Credit Ratings and Capital Structure

51 Pages Posted: 9 Mar 2003

See all articles by Darren J. Kisgen

Darren J. Kisgen

Boston College - Carroll School of Management

Date Written: May 29, 2003


This paper examines the impact of credit ratings on capital structure decisions. I find that firms near a change in credit rating issue (retire) annually up to 1.5% less (more) debt relative to equity as a percentage of total assets than firms not near a change in rating, reflecting managers' desire to obtain upgrades and avoid downgrades of the firm's credit rating. These results are shown to be distinct from financial distress concerns. The results are robust to several model specifications and inclusion of control variables. I further show how credit rating effects complement the pecking order and tradeoff capital structure theories, and find that dummy variables, indicating firms are near a change in rating, remain predictive when nested in previous empirical tests of these theories. The results of this paper do not appear to be explained with traditional theories of capital structure, and thus this paper enhances the capital structure decision theoretical and empirical frameworks. To my knowledge, this is the first paper to show that credit ratings directly affect capital structure decision-making.

Keywords: Capital Structure, Credit Ratings, Leverage, Tradeoff Theory, Pecking Order

JEL Classification: G32, G20, G28

Suggested Citation

Kisgen, Darren J., Credit Ratings and Capital Structure (May 29, 2003). Available at SSRN: or

Darren J. Kisgen (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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