Do credit ratings really affect capital structure?

Abstract

Scope and Method of Study: This paper revisits the recently tested theory of credit ratings affecting capital structure. While this has been a phenomenon observed by practitioners for year, it only recently has been studied empirically by academics. To add to the brief existing literature, I introduce subsamples of firms with the belief that not all firms are interested in following a capital structure policy that considers credit ratings. Instead, certain firms should be more likely to follow such a road map as particular segments might be more concerned with maintaining a credit rating. In addition, I also introduce a new catalyst to proxy for a threat to a credit rating, namely the CreditWatch list of Standard & Poor's.

Findings and Conclusions: The findings suggest that credit ratings are not a first order concern in capital structure decisions. Rather, firms use credit ratings to reduce asymmetric information when other tools are absent.