The influence of possible credit score upgrades and downgrades on companies’ capital structure

Abstract

The present Dissertation purpose is to understand if and how managers alter their firm’s capital structure when facing possible upgrades or downgrades of credit ratings through a sample of 10339 observations in the 2001­2021 time­spam. The possible changes in credit rating are observed through two different dummy variables. The first one ­CRpom­ includes companies with a plus or a minus in their credit rating and thus regrouping firms near notch rating changes. The second one ­CRhorl­ takes the value of one for companies in the higher and lower third of each rating based on a score calculated through an equation that tries to mimic credit rating agencies’ scores criteria. The results show that managers do adapt capital structure but only for changes in credit ratings and interestingly in opposite ways. Companies near upgrades tend to use less debt while the ones near a downgrade seem to have a decrease in debt. The same questions are asked for a second sample where debt is broken down into seven categories. Bond levels are significantly impacted by upgrades and downgrades. More precisely, companies in either situation see bond levels diminish. This also highlights the importance of studying debt as a complex and heterogeneous source of financing. The results are robust for investment and non­investment grade companies as well as across credit ratings and time.

Date of Award	26 Jan 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)