Impact of credit ratings on firms

: capital structure

Abstract

Credit ratings play an important role in the capital markets and are at the center of managers' attention. Although comprehensively studied in various fields only in the past decades research has been conducted of their potential impact on firm's capital structures. In this dissertation I set out to study this exactly. The main hypothesis postulated is that firms near a broad rating change will issue less debt relative to equity as a percentage of total assets, than firms which are farther from a broad rating change. I use an extended application of Kisgen (2006) model to regress net debt issuance on POM, plus and minus dummies, control variables and different firm-specific attribute. I find that firms near a broad credit rating change do not take capital structure costs into consideration, being as likely to issuing less debt relative to equity than firms who are not near a rating change. Moreover, I find that the need of external financing, growth and commercial paper issuance are firm attributes that do not motivate firms near a rating change to alter their financing behavior and these are therefore as likely to issue more debt relative to equity as any other firm. Ultimately, I provide evidence to suggest that managers do not take potential broad rating changes’ costs and their impacts on target capital structure into consideration when making capital structure decisions.

Date of Award	3 May 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Mário Meira (Supervisor)