The effect of credit rating discontinuity on firms’ capital structure

Abstract

This dissertation compares rated and formerly rated firms regarding their capital structure.Using a panel dataset from 1991 to 2014, I estimate the effect of credit rating discontinuity onfirms’ debt-to-equity issuance, leverage, net debt issuance, and cash holdings as proxies fortheir capital structure decisions. I use a set of OLS regressions with established control variablesand employ time, firm, and industry fixed effects. The results suggest that we do observe ratingdiscontinuity within this sample and that firms experiencing periods without S&P rating andcontinuously rated firms present differences in capital structure. Firms with rating discontinuityshow lower debt-to-equity issuance, lower leverage, less net debt issuances, and higher cashholdings than continuously rated firms. These effects strengthen over time. However, this workcannot finally prove the existence of rating discontinuity. Without assuming that ratings fromother CRAs are perfect substitutes for S&P ratings, there is still the possibility of other aspects, like issuer shopping, causing those differences in capital structure. Further, the findings suggesta small reputation effect on net debt issuance and leverage levels. The results are robust tochanges in leverage definitions and the addition of rating and investment grade information tothe models.

Date of Award	5 Jul 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Mário Meira (Supervisor)