Advanced

The impact of credit ratings on firms’ capital structure decisions – A study on the European market

Van Berlekom, Johan LU ; Bojmar, Emelie LU and Linnard, Johanna LU (2012) FEKH95 20121
Department of Business Administration
Abstract
The aim of this study is to empirically investigate the impact of credit ratings on European firms’ capital structure decisions based on the premise of Darren Kisgen’s Credit Ratings–Capital Structure (CR-CS) hypothesis: that firms face discrete costs (benefits) associated with differences in credit rating levels.

This project's empirical investigations are based on historical data from Standard & Poor's long-term issuer rating and firm financials on a sample of 169 firms. The data collected covers a 10-year period, amounting to a total of 1,464 firm-years (1,374 excluding missing values for commonly used variables).

The findings of this study support the hypothesis of credit ratings as a determinant in firms’ choice of capital... (More)
The aim of this study is to empirically investigate the impact of credit ratings on European firms’ capital structure decisions based on the premise of Darren Kisgen’s Credit Ratings–Capital Structure (CR-CS) hypothesis: that firms face discrete costs (benefits) associated with differences in credit rating levels.

This project's empirical investigations are based on historical data from Standard & Poor's long-term issuer rating and firm financials on a sample of 169 firms. The data collected covers a 10-year period, amounting to a total of 1,464 firm-years (1,374 excluding missing values for commonly used variables).

The findings of this study support the hypothesis of credit ratings as a determinant in firms’ choice of capital structure. We find that concerns of discrete costs associated with changes in credit ratings result in adjustments being made to capital structure: firms near a change in Broad Rating and investment-grade/speculative-grade status issue 0.97% and 1.60% less debt relative to equity, respectively, than firms not near a change. This behaviour does not appear to be explained by the trade-off and pecking order theories. This study also expands the empirical scope on this topic. Previous investigations have largely been limited to the US (and to some extent, international) market, whilst this study investigates the CR-CS hypothesis on a European sample. Moreover, the analytical structure of this study further refines and strengthens the analytical basis of the hypothesis. (Less)
Please use this url to cite or link to this publication:
author
Van Berlekom, Johan LU ; Bojmar, Emelie LU and Linnard, Johanna LU
supervisor
organization
course
FEKH95 20121
year
type
M2 - Bachelor Degree
subject
keywords
Credit ratings, capital structure, financing policy, trade-off theory, pecking order theory
language
English
id
2837238
date added to LUP
2012-06-26 15:07:03
date last changed
2012-06-26 15:07:03
@misc{2837238,
  abstract     = {The aim of this study is to empirically investigate the impact of credit ratings on European firms’ capital structure decisions based on the premise of Darren Kisgen’s Credit Ratings–Capital Structure (CR-CS) hypothesis: that firms face discrete costs (benefits) associated with differences in credit rating levels.

This project's empirical investigations are based on historical data from Standard & Poor's long-term issuer rating and firm financials on a sample of 169 firms. The data collected covers a 10-year period, amounting to a total of 1,464 firm-years (1,374 excluding missing values for commonly used variables).

The findings of this study support the hypothesis of credit ratings as a determinant in firms’ choice of capital structure. We find that concerns of discrete costs associated with changes in credit ratings result in adjustments being made to capital structure: firms near a change in Broad Rating and investment-grade/speculative-grade status issue 0.97% and 1.60% less debt relative to equity, respectively, than firms not near a change. This behaviour does not appear to be explained by the trade-off and pecking order theories. This study also expands the empirical scope on this topic. Previous investigations have largely been limited to the US (and to some extent, international) market, whilst this study investigates the CR-CS hypothesis on a European sample. Moreover, the analytical structure of this study further refines and strengthens the analytical basis of the hypothesis.},
  author       = {Van Berlekom, Johan and Bojmar, Emelie and Linnard, Johanna},
  keyword      = {Credit ratings,capital structure,financing policy,trade-off theory,pecking order theory},
  language     = {eng},
  note         = {Student Paper},
  title        = {The impact of credit ratings on firms’ capital structure decisions – A study on the European market},
  year         = {2012},
}