IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2020-05-10.html
   My bibliography  Save this article

The Impact of Credit Ratings on Firms Capital Structure

Author

Listed:
  • Rana Abdelhafeez Feda

    (Department of Finance, College of Business Administration, Prince Sultan University, Riyadh, Saudi Arabia)

Abstract

In today s financial markets, credit ratings play a significant role on the creditworthiness of firms as it represents the ability of a firm paying back debt and firm s risk of default. The purpose of this study is to empirically evaluate the impact of credit ratings on firms leverage decisions. This paper examines firms leverage behavior with the discrete benefits of higher credit rating hypothesis presented by Kisgen (2009). The empirical tests were designed based on the Partial Adjustment Model by Flannery and Rangan (2006). Firms that have faced a downgrade are more likely to reduce their financial leverage by reducing debts and issuing equity, with conscious of the costs of doing so. While firms that been upgraded from speculative grade to investment grade do little changes in their capital structure to maintain the discrete benefits attributable to higher credit ratings. The results of this paper are persisted with CR-CS hypothesis.

Suggested Citation

  • Rana Abdelhafeez Feda, 2020. "The Impact of Credit Ratings on Firms Capital Structure," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 92-101.
    • Handle: RePEc:eco:journ1:2020-05-10
    as

    Download full text from publisher

    File URL: https://www.econjournals.com/index.php/ijefi/article/download/10436/pdf
    Download Restriction: no
    File URL: https://www.econjournals.com/index.php/ijefi/article/view/10436/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hui Chen, 2010. "Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure," Journal of Finance, American Finance Association, vol. 65(6), pages 2171-2212, December.
    2. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    3. Manso, Gustavo, 2013. "Feedback effects of credit ratings," Journal of Financial Economics, Elsevier, vol. 109(2), pages 535-548.
    4. Xin Chang & Sudipto Dasgupta, 2009. "Target Behavior and Financing: How Conclusive Is the Evidence?," Journal of Finance, American Finance Association, vol. 64(4), pages 1767-1796, August.
    5. de Jong, Abe & Kabir, Rezaul & Nguyen, Thuy Thu, 2008. "Capital structure around the world: The roles of firm- and country-specific determinants," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1954-1969, September.
    6. Ramin P. Baghai & Henri Servaes & Ane Tamayo, 2014. "Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing," Journal of Finance, American Finance Association, vol. 69(5), pages 1961-2005, October.
    7. Faiza Sajjad & Muhammad Zakaria, 2018. "Credit Rating as a Mechanism for Capital Structure Optimization: Empirical Evidence from Panel Data Analysis," IJFS, MDPI, vol. 6(1), pages 1-14, January.
    8. Darren J. Kisgen, 2006. "Credit Ratings and Capital Structure," Journal of Finance, American Finance Association, vol. 61(3), pages 1035-1072, June.
    9. Darren J. Kisgen & Philip E. Strahan, 2010. "Do Regulations Based on Credit Ratings Affect a Firm's Cost of Capital?," The Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4324-4347, December.
    10. Bandyopadhyay, Arindam & Barua, Nandita Malini, 2016. "Factors determining capital structure and corporate performance in India: Studying the business cycle effects," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 160-172.
    11. Kisgen, Darren J., 2009. "Do Firms Target Credit Ratings or Leverage Levels?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(6), pages 1323-1344, December.
    12. Michael R. Roberts & Amir Sufi, 2009. "Control Rights and Capital Structure: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 64(4), pages 1657-1695, August.
    13. Beck, Thorsten & Demirgüç-Kunt, Asli & Maksimovic, Vojislav, 2008. "Financing patterns around the world: Are small firms different?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 467-487, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Valentina Bruno & Jess Cornaggia & Kimberly J. Cornaggia, 2016. "Does Regulatory Certification Affect the Information Content of Credit Ratings?," Management Science, INFORMS, vol. 62(6), pages 1578-1597, June.
    2. Cornaggia, Jess & Cornaggia, Kimberly J. & Xia, Han, 2016. "Revolving doors on Wall Street," Journal of Financial Economics, Elsevier, vol. 120(2), pages 400-419.
    3. Kisgen, Darren J., 2019. "The impact of credit ratings on corporate behavior: Evidence from Moody's adjustments," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 567-582.
    4. Patrick Behr & Darren J. Kisgen & Jérôme P. Taillard, 2018. "Did Government Regulations Lead to Inflated Credit Ratings?," Management Science, INFORMS, vol. 64(3), pages 1034-1054, March.
    5. Hess, Dieter & Immenkötter, Philipp, 2014. "How much is too much? Debt capacity and financial flexibility," CFR Working Papers 14-03, University of Cologne, Centre for Financial Research (CFR).
    6. ElBannan, Mona A., 2017. "Stock market liquidity, family ownership, and capital structure choices in an emerging country," Emerging Markets Review, Elsevier, vol. 33(C), pages 201-231.
    7. Xia, Han, 2014. "Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 450-468.
    8. Manuel Adelino & Igor Cunha & Miguel A. Ferreira, 2017. "The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration," The Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 3223-3268.
    9. Shoaib Ali & Attiya Yasmin Javid, 2015. "Relationship between Credit Rating, Capital Structure and Earning Management Behaviour: Evidence from Pakistani Listed Firms," PIDE-Working Papers 2015:121, Pakistan Institute of Development Economics.
    10. Goergen, Marc & Gounopoulos, Dimitrios & Koutroumpis, Panagiotis, 2021. "Do multiple credit ratings reduce money left on the table? Evidence from U.S. IPOs," Journal of Corporate Finance, Elsevier, vol. 67(C).
    11. Deng, Kaihua & Qiao, Guannan, 2022. "Triple A default," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    12. Aktas, Nihat & Petmezas, Dimitris & Servaes, Henri & Karampatsas, Nikolaos, 2021. "Credit ratings and acquisitions," Journal of Corporate Finance, Elsevier, vol. 69(C).
    13. Chauhan, Gaurav Singh & Huseynov, Fariz, 2018. "Corporate financing and target behavior: New tests and evidence," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 840-856.
    14. Bradley, Daniel & Pantzalis, Christos & Yuan, Xiaojing, 2016. "Policy risk, corporate political strategies, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 254-275.
    15. Abad, Pilar & Díaz, Antonio & Escribano, Ana & Robles, M.-Dolores, 2021. "Crossing boundaries beyond the investment grade: Induced trading by rating-contingent investment constraints," Journal of Corporate Finance, Elsevier, vol. 67(C).
    16. Kladakis, George & Skouralis, Alexandros, 2024. "Credit rating downgrades and systemic risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 90(C).
    17. Krystyniak, Karolina & Staneva, Viktoriya, 2024. "The myth of tightening credit rating standards in the market for corporate debt," Journal of Banking & Finance, Elsevier, vol. 162(C).
    18. Wojewodzki, Michal & Boateng, Agyenim & Brahma, Sanjukta, 2020. "Credit rating, banks' capital structure and speed of adjustment: A cross-country analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).
    19. Huang, He & Svec, Jiri & Wu, Eliza, 2021. "The game changer: Regulatory reform and multiple credit ratings," Journal of Banking & Finance, Elsevier, vol. 133(C).
    20. Natalia Szomko, 2017. "The Importance of Estimation Method Choice for the Analysis of the Determinants of Capital Structure– An Example of Poland," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 3(1), pages 3-20, June.

    More about this item

    Keywords

    Financial Markets; Credit; Debt Management; Firm Performance; Capital Investment;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2020-05-10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.