Do credit ratings affect capital structure choices?
Stylianopoulou, Fani
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.
