tailieunhanh - Credit Ratings and Capital Structure

Already about two decades ago, Robert Lucas (1990) asked: “Why Doesn’t Capital Flow from Rich to Poor Countries?”, wondering why only very little capital in net term was flowing from the industrial world to developing economies. In the past years, this trend has even aggravated: Nowadays, in many cases, net capital flows have reversed and are now flowing from developing and emerging countries towards the rich world, especially towards the United States, United Kingdom, Australia and Spain. Not only China and other Asian countries are showing current account surpluses (and hence net capital exports). Also a number of Latin American. | THE JOURNAL OF FINANCE VOL. LXI NO. 3 JUNE 2006 Credit Ratings and Capital Structure DARREN J. KISGEN ABSTRACT This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs benefits associated with firm credit rating level differences and tests whether concerns for these costs benefits directly affect debt and equity financing decisions. Firms near a credit rating upgrade or downgrade issue less debt relative to equity than firms not near a change in rating. This behavior is consistent with discrete costs benefits of rating changes but is not explained by traditional capital structure theories. The results persist within previous empirical tests of the pecking order and tradeoff capital structure theories. Managers appear to take credit ratings into account when making capital structure decisions. For example the Wall Street Journal WSJ 2004 reported that EDS was issuing more than 1 billion in new shares hoping to forestall a credit-rating downgrade Barron s 2003 reported that Lear Corp. reduced its debt because they were striving to win an investment-grade bond rating above the current BB-plus from Standard Poor s and the WSJ 2002 reported that Fiat was racing to reduce the company s debt because it was increasingly worried about a possible downgrade of its credit rating. More formally Graham and Harvey 2001 find that credit ratings are the second highest concern for CFOs when determining their capital structure with of CFOs saying that credit ratings were important or very important in how they choose the appropriate amount of debt for their firm. Moreover Graham and Harvey report that credit ratings ranked higher than many factors suggested by traditional capital structure theories such as the tax advantage of interest deductibility. This paper contributes to the theoretical and empirical capital structure decision frameworks by examining the influence of credit ratings on capital structure