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Credit Ratings and Capital Structure
Author(s) -
KISGEN DARREN J.
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.00866.x
Subject(s) - downgrade , capital structure , credit rating , debt , affect (linguistics) , pecking order theory , economics , cost of capital , equity (law) , bond credit rating , pecking order , business , financial economics , finance , microeconomics , credit reference , credit risk , incentive , linguistics , philosophy , computer security , evolutionary biology , biology , computer science , political science , law
This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs (benefits) associated with firm credit rating level differences and tests whether concerns for these costs (benefits) directly affect debt and equity financing decisions. Firms near a credit rating upgrade or downgrade issue less debt relative to equity than firms not near a change in rating. This behavior is consistent with discrete costs (benefits) of rating changes but is not explained by traditional capital structure theories. The results persist within previous empirical tests of the pecking order and tradeoff capital structure theories.