Credit Rating Targets

51 Pages Posted: 3 Mar 2008 Last revised: 20 Jun 2009

See all articles by Armen Hovakimian

Armen Hovakimian

Baruch College - Zicklin School of Business

Ayla Kayhan

Commodity Futures Trading Commission (CFTC); Louisiana State University

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: April 29, 2009


Credit ratings can be viewed as a summary statistic that captures various elements of a firm’s capital structure. They incorporate a firm’s debt ratio, the maturity and priority structure of its debt, as well as the volatility of its cash flows. However, regressions of credit ratings on firm characteristics provide inferences that are not always consistent with the interpretations of extant regressions that include various debt ratios as independent variables. In particular, we find that coefficients of variables that have been viewed as proxies for the uniqueness and the extent that assets can be redeployed, e.g., R&D expenses and asset tangibility, have different effects in the credit rating regressions than in the debt ratio regressions. In addition, we find that after controlling for whether or not firms have debt ratings, the extant evidence of a positive relation between debt ratios and size is reversed. Finally, using regression-based proxies for target ratings and debt ratios, we find that deviations from rating targets as well as debt ratio targets influence subsequent corporate finance choices. When observed ratings are below (above) the target, firms tend to make security issuance and repurchase decisions that reduce (increase) leverage. In addition, firms are more likely to decrease (increase) dividend payouts when they have below (above) target ratings and make more (fewer) acquisitions when they have above (below) target ratings.

Keywords: credit rating, leverage, capital structure, target capital structure, tradeoff theory

JEL Classification: G32, G34

Suggested Citation

Hovakimian, Armen and Kayhan, Ayla and Titman, Sheridan, Credit Rating Targets (April 29, 2009). Available at SSRN: or

Armen Hovakimian (Contact Author)

Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)


Ayla Kayhan

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

Louisiana State University ( email )

E. J. Ourso School of Business
Department of Finance
Baton Rouge, LA 70803
United States


Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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