Credit Rating and the Impact on Capital Structure

Credit Rating and the Impact on Capital Structure PDF

Author: Christian Kronwald

Publisher: GRIN Verlag

Published: 2010-03-25

Total Pages: 39

ISBN-13: 3640575571

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Seminar paper from the year 2009 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, University of Hohenheim (Lehrstuhl für Bankwirtschaft und Finanzdienstleistungen), language: English, abstract: The question about capital structure is one of the most important issues which the management of a company faces in implementing their daily business. Therefore, the question of which factors affect capital structure decisions attracts high attention in the past and recent literature on capital structure. There are many papers providing valuable insights into capital structure choices, starting with the paper of Modigliani and Miller (1958). The MM-Theorem is generally considered a purely theoretical result since it ignores important factors in the capital structure decision like bank-ruptcy costs, taxes, agency costs and information asymmetry. Based on this paper many other theories which consider factors neglected by Modigliani and Miller have been evolved. Two major theories are the Tradeoff- and the Pecking-Order-Theory. The former loosens assumptions stated in the MM-Theorem by including bankruptcy costs and taxes while the latter introduces information asymmetry into the capital structure discussion. Chapter 2.1 will give a brief overview of these theories. For complexity reasons these models cannot capture all relevant factors affecting the capital structure policy of a company. However, all these theories disregard one cru-cial factor which plays an important role on capital markets all over the world. The significance of Credit Ratings is gradually increasing, and it is doing so in many re-spects. This paper focuses on the Credit Rating-Capital Structure-Hypotheses (CRCS) developed by Darren J. Kisgen as a modern approach to the capital structure discussion. The hypothesis argues that credit ratings have an impact on capital struc-ture decisions due to discrete costs (benefits) associated with a rating change. Firstly, reasons why credit ratings are material for capital structure decisions will be out-lined. Then, situations in which credit rating effects play a role will be examined. For this issue it is very important to show how it can be measured whether a firm is con-cerned about a rating change or not. Afterwards the CR-CS will be empirically tested. The traditional theories don’t explain the results obtained in these tests. Therefore credit rating effects will be combined with factors discussed in the Tradeoff- and Pecking-Order-Theory. In subsequent empirical tests credit rating factors will be integrated into previous capital structure test to show that the results of the CR-CS tests remain statistically significant...

The Influence of Credit Ratings on Capital Structure

The Influence of Credit Ratings on Capital Structure PDF

Author: Joseph D. Cursio

Publisher:

Published: 2016

Total Pages: 38

ISBN-13:

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We find partial support for the Credit Rating-Capital Structure hypothesis: firms make a larger effort to avoid a potential credit rating downgrade; but not to achieve an upgrade. Credit ratings provide information to investors, and therefore changes in credit ratings affect markets. Financial markets punish firms which have a downgrade in credit ratings via covenant restrictions. Firms near a potential credit downgrade make larger capital structure changes in capital structure decisions. However, the extent of the effect of credit ratings to capital structure choice may vary across the types of companies. This article examines to what extent credit ratings affect the choice of capital structure in business segments. The paper identifies the magnitude of capital structure changes vary for financial firms and for utility companies, is greater for non-investment (i.e. speculative) grade firms due to a certification effect, and the magnitude varies over both time and across the credit spectrum, and is related to credit spreads.

The Impact of Credit Ratings-Related Regulation on Capital Structure Decisions

The Impact of Credit Ratings-Related Regulation on Capital Structure Decisions PDF

Author: Blaise Giroud

Publisher:

Published: 2007

Total Pages:

ISBN-13:

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This thesis examines to what extent the use of credit ratings-dependent rules in prudential regulation affect capital structure decisions at rated firms. The thesis shows that, though primarily aimed at investors to curb excessive risk taking, these rules have normative implications for issuers as well. More specifically, because these rules de facto negatively impact availability and cost of debt funding at specific rating thresholds, borrowers tend to restrict their reliance on debt when near these thresholds. By contrasting American and European practices, the thesis reveals that this effect is more pronounced in regulatory environments that heavily rely on credit ratings in their legislation (as in the United States) than in other cases where the reliance is lower (as in Europe). Given the unnecessary burden these rules impose on firms' financial flexibility, government officials and regulative bodies should carefully consider alternative ways of exerting their prudential oversight, provided they are concerned with market efficiency.

The Impact of Credit Rating Changes on Capital Structure Decisions

The Impact of Credit Rating Changes on Capital Structure Decisions PDF

Author: Wolfgang Drobetz

Publisher:

Published: 2014

Total Pages: 35

ISBN-13:

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Changes in corporate credit ratings affect subsequent capital structure decisions. The results for listed companies in our U.S. sample support Kisgen's (2006, 2009) credit rating-capital structure hypothesis. However, applying a system GMM system approach, the implications of this hypothesis are weakened by our estimates for the speed of capital structure adjustment after credit rating changes. In contrast, publicly listed companies in our German sample are widely independent from changes in their creditworthiness. Similarly, changes in the capital structure and financing choices of high creditworthy privately-held firms in Germany are more or less independent from credit rating changes. At speculative grade rating levels, however, these firms implement financing activities that strengthen their capital structure subsequent to a rating downgrade. Our findings for the speed of adjustment support these results. We find some contradictory patterns for credit rating upgrades at lower rating levels. We conclude that the close relationship of German firms, whether publicly listed or not, to their banks helps them to mitigate else substantial effects of adverse changes in their creditworthiness.

Do Credit Ratings Really Affect Capital Structure?

Do Credit Ratings Really Affect Capital Structure? PDF

Author: Kristopher Kemper

Publisher:

Published: 2018

Total Pages: 31

ISBN-13:

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This paper revisits recent investigations into the role credit ratings play in the marginal financing behavior of firms. While it has long been documented that credit ratings may be an important determinant of firm capital structure policy, academics have only recently subjected this motivation to empirical scrutiny. We add to the brief existing literature by investigating the sensitivity of marginal financing behavior of firms to a number of attributes deemed to capture firms' affinity to emphasize credit ratings in their financing behavior. Our results suggest that credit ratings are not a first order concern in capital structure decisions.

Credit Rating and the Impact on Capital Structure

Credit Rating and the Impact on Capital Structure PDF

Author: Christian Kronwald

Publisher: GRIN Verlag

Published: 2010-03

Total Pages: 73

ISBN-13: 3640575490

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Seminar paper from the year 2009 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, University of Hohenheim (Lehrstuhl für Bankwirtschaft und Finanzdienstleistungen), language: English, abstract: The question about capital structure is one of the most important issues which the management of a company faces in implementing their daily business. Therefore, the question of which factors affect capital structure decisions attracts high attention in the past and recent literature on capital structure. There are many papers providing valuable insights into capital structure choices, starting with the paper of Modigliani and Miller (1958). The MM-Theorem is generally considered a purely theoretical result since it ignores important factors in the capital structure decision like bank-ruptcy costs, taxes, agency costs and information asymmetry. Based on this paper many other theories which consider factors neglected by Modigliani and Miller have been evolved. Two major theories are the Tradeoff- and the Pecking-Order-Theory. The former loosens assumptions stated in the MM-Theorem by including bankruptcy costs and taxes while the latter introduces information asymmetry into the capital structure discussion. Chapter 2.1 will give a brief overview of these theories. For complexity reasons these models cannot capture all relevant factors affecting the capital structure policy of a company. However, all these theories disregard one cru-cial factor which plays an important role on capital markets all over the world. The significance of Credit Ratings is gradually increasing, and it is doing so in many re-spects. This paper focuses on the Credit Rating-Capital Structure-Hypotheses (CRCS) developed by Darren J. Kisgen as a modern approach to the capital structure discussion. The hypothesis argues that credit ratings have an impact on capital struc-ture decisions due to discrete costs (benefits) associated with a rating change. Firstly,

Capital Structure Decisions

Capital Structure Decisions PDF

Author: Yamini Agarwal

Publisher: John Wiley & Sons

Published: 2013-03-29

Total Pages: 208

ISBN-13: 111820316X

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Inside the risk management and corporate governance issues behind capital structure decisions Practical ways of determining capital structures have always been mysterious and riddled with risks and uncertainties. Dynamic paradigm shifts and the multi-dimensional operations of firms further complicate the situation. Financial leaders are under constant pressure to outdo their competitors, but how to do so is not always clear. Capital Structure Decisions offers an introduction to corporate finance, and provides valuable insights into the decision-making processes that face the CEOs and CFOs of organizations in dynamic multi-objective environments. Exploring the various models and techniques used to understand the capital structure of an organization, as well as the products and means available for financing these structures, the book covers how to develop a goal programming model to enable organization leaders to make better capital structure decisions. Incorporating international case studies to explain various financial models and to illustrate ways that capital structure choices determine their success, Capital Structure Decisions looks at existing models and the development of a new goal-programming model for capital structures that is capable of handling multiple objectives, with an emphasis throughout on mitigating risk. Helps financial leaders understand corporate finance and the decision-making processes involved in understanding and developing capital structure Includes case studies from around the world that explain key financial models Emphasizes ways to minimize risk when it comes to working with capital structures There are a number of criteria that financial leaders need to consider before making any major capital investment decision. Capital Structure Decisions analyzes the various risk management and corporate governance issues to be considered by any diligent CEO/CFO before approving a project.

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