The role of credit ratings on capital structure and its speed of adjustment: an international study

  • Michal Wojewodzki, Winnie P.H. Poon, Jianfu Shen
  • European Journal of Finance, July 2017, Taylor & Francis
  • DOI: 10.1080/1351847x.2017.1354900

The importance of credit ratings to firms operating in different countries

What is it about?

We answer three main questions: (1) What is the effect of credit rating (for example AAA versus BB-) on firms’ leverage? (2) What is the effect of credit rating on the speed with which firms adjust their capital structure to hold to an optimal level (the best combination of debt and equity given pros and cons of each of them)? (3) Do the effects from (1) and (2) depend on the financial orientation of a country in which rated firms are based (by comparing the size, activity, and efficiency of a stock market to those of a banking system in an economy) ?

Why is it important?

To the best of our knowledge, this paper is the first to show that poorly rated firms have more rapid adjustment in their capital structure than highly rated firms. There is ample evidence that in practice, managers care about credit rating levels; thus it is meaningful to directly test the impact of credit ratings on leverage ratios.

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