The Role of Credit Ratings on Capital Structure and Its Speed of Adjustment: An International Study
Michal Wojewodzki, Winnie P.H. Poon & Jianfu Shen (2018) The role of credit ratings on capital structure and its speed of adjustment: an international study, The European Journal of Finance, 24:9, 735-760, DOI: 10.1080/1351847X.2017.1354900
27 Pages Posted: 19 Nov 2020 Last revised: 10 Jul 2022
Date Written: July 4, 2017
Using an international data set, we examine the role of issuers’ credit ratings in explaining corporate leverage and the speed with which firms adjust toward their optimal level of leverage. We find that, in countries with a more market-oriented financial system, the impact of credit ratings on firms’ capital structure is more significant and that firms with a poorer credit rating adjust more rapidly. Furthermore, our results show some striking differences in the speed of adjusting capital structure between firms rated as speculative and investment grade, with the former adjusting much more rapidly. As hypothesized, those differences are statistically significant only for firms based in a more market-oriented economy.
Keywords: capital structure, credit ratings, speed of adjustment
JEL Classification: G32, G24, G15
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