The Impact of Credit Rating Changes on Capital Structure Decisions: Evidence from Non-Listed Firms in Germany

35 Pages Posted: 10 Feb 2014

See all articles by Wolfgang Drobetz

Wolfgang Drobetz

University of Hamburg

Sascha Heller

University of Hamburg

Date Written: January 30, 2014

Abstract

Changes in corporate credit ratings affect subsequent capital structure decisions. The results for listed companies in our U.S. sample support Kisgen’s (2006, 2009) credit rating-capital structure hypothesis. However, applying a system GMM system approach, the implications of this hypothesis are weakened by our estimates for the speed of capital structure adjustment after credit rating changes. In contrast, publicly listed companies in our German sample are widely independent from changes in their creditworthiness. Similarly, changes in the capital structure and financing choices of high creditworthy privately-held firms in Germany are more or less independent from credit rating changes. At speculative grade rating levels, however, these firms implement financing activities that strengthen their capital structure subsequent to a rating downgrade. Our findings for the speed of adjustment support these results. We find some contradictory patterns for credit rating upgrades at lower rating levels. We conclude that the close relationship of German firms, whether publicly listed or not, to their banks helps them to mitigate else substantial effects of adverse changes in their creditworthiness.

Keywords: capital structure, financing decisions, speed of adjustment, credit ratings, non-listed companies

JEL Classification: G32, G24

Suggested Citation

Drobetz, Wolfgang and Heller, Sascha, The Impact of Credit Rating Changes on Capital Structure Decisions: Evidence from Non-Listed Firms in Germany (January 30, 2014). Available at SSRN: https://ssrn.com/abstract=2392436 or http://dx.doi.org/10.2139/ssrn.2392436

Wolfgang Drobetz (Contact Author)

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Sascha Heller

University of Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

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