Credit rating and capital structure
: how concerned are managers about credit ratings?

  • Frederik Antonius Gödde (Student)

Student thesis: Master's Thesis

Abstract

This dissertation answers several questions regarding managers' concerns about firms' credit ratings by using credit scoring to identify firms that are close to a change in their micro credit rating and by assessing their capital structure decisions over the following 12 months. First, the work reconfirms the existing literature by providing empirical evidence that managers adjust their capital structure based on concerns about imminent micro credit rating shifts. In addition, analysis proves that managers adjust capital structure to a greater extent when they are more likely to face a rating change. Specifically, firms reduce DE (Debt to Equity) Issuance by 1.6% when they are in the one-fifth (1.0% when in the one-third) of firms that are likely to face a rating downgrade in the future. Furthermore, results confirm that the use of a scoring mechanism to classify firms as close to a rating change is of little importance, as a more sophisticated approach used in this dissertation shows similar results to the literature. Next, results proof that firms classified as investment grade behave differently in terms of capital structure adjustments compared to the entire sample, by showing a 0.1 percentage point larger reduction in DE Issuance compared to the full sample. Finally, this dissertation investigates the key factors driving changes in DE Issuance, focusing on firms' behaviour regarding equity and debt instruments. Specifically, it assesses Net Equity Issuance and Net Debt Issuance separately. The findings highlight that managers prefer using debt to respond to micro credit rating changes.
Date of Award24 Oct 2023
Original languageEnglish
Awarding Institution
  • Universidade Católica Portuguesa
SupervisorMário Meira (Supervisor)

Keywords

  • Credit rating
  • Capital structure
  • Credit rating changes
  • Credit scoring
  • Credit risk
  • DE (Debt to Equity) Issuance
  • Net Equity Issuance
  • Net Debt Issuance
  • Managerial behaviour

Designation

  • Mestrado em Finanças

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