Do credit ratings affect capital structure choices?
School of Economics, Business Administration and Legal Studies, Executive MBA
We test, whether UK market is sensitive to credit rating reports,
regarding its capital structure choices. Our main aim is to identify the
magnitude, if there is any, of managers’ concern. Do UK firm managers form
capital structure with the fear of credit ratings? Evidence from US, suggests that
managers do take into account seriously, CRA’s reports. Except from the basic
question, we examine secondary, but still important, aspects of credit rating.
The significance of intra category up (down) grades is the most crucial. Further,
we try to identify the relevance of specific financial distress indicators, such as
interest coverage and leverage, with managers’ concern.
We use Amadeus and gather data for non financial UK firms for the
years 2002 to 2010. Our results align, merely, with the US evidence. Regarding
the basic question, managers appear to lay attention to credit rating and to adjust
their capital structure decisions according to their credit ranking. Further, intra
category rating is of minor importance compared to the broad rating, and
managers are concerned mainly for the latter. Nevertheless, the question
whether firm financial health matters more than credit rating, remains
unanswered, demanding for further research.