Credit rating, banks' capital structure and speed of adjustment: A cross-country analysis (original) (raw)
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The role of credit ratings on capital structure and its speed of adjustment: an international study
The European Journal of Finance, 2017
Using an international dataset, we examine the role of issuers' credit ratings in explaining corporate leverage and the speed with which firms adjust toward their optimal level of leverage. We find that, in countries with a more market-oriented financial system, the impact of credit ratings on firms' capital structure is more significant and that firms with a poorer credit rating adjust more rapidly. Furthermore, our results show some striking differences in the speed of adjusting capital structure between firms rated as speculative-and investment-grade, with the former adjusting much more rapidly. As hypothesized, those differences are statistically significant only for firms based in a more market-oriented economy.
International Journal of Financial Studies
This paper empirically examines the significance of credit ratings for optimal capital structure decisions. Non-financial Asian listed companies, evaluated by Standard and Poor's, are selected from 2000 to 2016. Panel data analysis with pooled ordinary least square (OLS), fixed effect (FE), and generalized method of moment (GMM) estimation techniques are employed to test the effect of each credit rating scale on capital structure choices. For the problem of heteroskedasticity in OLS, the heteroskedastic white consistent variance is used for the best fit of the model. Findings of all estimation techniques show that the relationship between credit rating scales and leverage ratio is a non-linear inverted U shape. High-and low-rated companies have a low level of leverage, whereas mid-rated companies have a high level of leverage. It is evident that costs and benefits of each rating scale have a substantial effect on the behavior of a company's choices for optimal capital structure. The study suggests that policymakers, investors, and financial officers should consider credit rating as an important measure of financing decisions.
Credit rating changes’ impact on banks: evidence from the US banking industry
2011
This study examines the impact of credit rating upgrades and downgrades on six comprehensive banks' asset classes, profitability, leverage and size using data from the Federal Deposit Insurance Corporation's call reports and Bloomberg over the period 1989-2008. In summary, the results suggest that a downgrade has a lasting and relatively more severe impact on banks than an upgrade; however, downgraded banks do not seem to effectively reduce their appetite for risk over a longer horizon.
Effects of credit rating changes on capital structure of Latin American firms
Revista de Contabilidade e Organizações
This study investigates whether non-financial Latin American firms adjust their capital structure in order to maintain certain rating levels. The credit rating-capital structure (CR-CS) hypothesis suggests that firms assume less debt after rating downgrades, aiming to retrieve necessary conditions to restore a better rating. Through panel data analysis for the 2000-2014 period and by using the generalized method of moments (GMM), we show that a rating downgrade does not accelerate the speed of adjustment to the target, indicating that firms do not target minimum rating levels, as predicted by the CR-CS hypothesis. Although, rating changes are related to firms’ capital structure, we conclude that Latin American firms do not adjust their capital structure to maintain certain rating levels.
The adjustment of bank ratings in the financial crisis: International evidence
The North American Journal of Economics and Finance, 2018
This paper analyses the adjustment occurring in the ratings of the banks of the United States and the European Union as a result of the financial crisis. It uses a methodology that permits decomposition of the observed change in the rating into an effect associated with the change in the agencies' rating policies and into another effect associated with the banks' asset situation. The results obtained show that with the crisis there was a generalised fall in the ratings. This fall is due both to a worsening of the banks' asset situation and to the hardening of rating policies. Specifically, we find that in Fitch 79.66% and in Standard and Poor's 63.93% of the fall in the rating is due to a hardening of the rating policies, while in Moody's the steep worsening of the banks' asset situation is offset by a slight improvement in the rating criteria. These changes suggest a procyclical behaviour in Standard and Poor's and Fitch, and conversely a through the cycle behaviour in Moody's.
Credit Rating Change and Capital Structure in Latin America
This study analyzes the impact of imminent reclassification of credit rating on the decision-making regarding capital structure of non-financial corporations listed in Latin America. Despite the importance attributed by the market agents and the existence of empirical evidence of the effect caused by rating in the capital structure of companies in developed countries, this issue is still incipient in Latin-American countries. For this purpose, all the non-financial corporation owners of, at least one corporate rating issued by an international rating agency were taken into account, with the requirement of being listed on a stock exchange in at least one Latin-American country. Through a data panel analysis comprising the period between 2001 and 2010 and by making use of the Generalized Method of Moments (GMM), the main results that were achieved did not indicate that non-financial corporations listed in Latin America, with imminent reclassification of ratings, adopt less debts than those without an imminent reclassification of their ratings. These findings suggest that the imminent reclassifications of credit ratings do not present important information for managers of non-financial corporations in Latin America when making decisions about capital structure.
Credit Ratings of the Banking Sector
2002
In this paper we analyse the credit rating transitions of banks in Europe, the United States and Japan by using a competing risks model. We have distinguished two types of rating transitions: upgrading and downgrading. We have used some bank characteristics, like country of domicile, type of bank, initial rating, as explanatory variables in our model. We have found that downgrading and upgrading are different types of processes. Downgrading is a memoryless process, whereas upgrading is not. The longer a rating has not changed, the higher the probability that it will be upgraded. Furthermore, the type of bank and country (Japan) matters in the downgrading process but not in the upgrading process. Banks which have a speculative rating show much more volatility in both upgrading and downgrading intensities than banks with an investment rating.
Do Credit Ratings Really Affect Capital Structure?
This paper revisits recent investigations into the role credit ratings play in the marginal financing behavior of firms. Although 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.
Banks and Bank Systems
The firm’s credit rating is an important communication tool and previous research has shown that many companies consider it important in capital structure decisions. This study examines the determinants of capital structure in MENA banks. In addition, it investigates the determinants of credit rating. Further, the impact of credit rating and capital structure on banks’ performance is examined. Therefore, this study is an attempt to answer the following questions: 1) what are the main determinants of capital structure? 2) how does credit rating affect capital structure? 3) what are the main determinants of credit rating? and 4) what is the effect of capital structure and credit rating on bank performance? The sample covers 169 banks and is divided into two sub-samples: rated (79) and non-rated banks (90). The results indicate that credit rating directly affects the capital structure decisions as rated banks use more debts than non-rated banks. Banks’ performance is positively associa...
Universal Journal of Accounting and Finance, 2021
Credit rating is a measure of a firm's creditworthiness in financial markets. The cost and benefit given from credit rating is supposed to affect the capital structure decision in the following year. This research examines the effect of each rating level on the capital structure level and examines how credit ratings are substantial for the firms to reach the optimal capital structure. It will also compare the impact of credit ratings from different agencies. Quarterly data of 110 firms that fulfil the requirements are gathered from 2010 until 2021. Panel data analysis using the fixed effects method shows a nonlinear U-shape between Standard & Poor’s and Fitch’s credit rating on capital structure level and on the distance to optimal capital structure level. Low and high rated firms tend to have higher debt levels in the following year and have a larger distance to the optimal capital structure level. Meanwhile, mid rated firms have lower debt levels and smaller distances. However, the result is opposite using Moody’s rating and insignificant using PEFINDO’s rating. This research suggests that credit rating is important to the capital structure decisions and other Indonesia firms could acquire credit rating especially from international rating agency.