Do Firms Target Credit Ratings or Leverage Levels?

38 Pages Posted: 22 Mar 2005 Last revised: 5 Mar 2009

See all articles by Darren J. Kisgen

Darren J. Kisgen

Boston College - Carroll School of Management

Date Written: October 5, 2005


Firms reduce leverage following credit rating downgrades. In the year following a downgrade, downgraded firms issue approximately 1.5-2.0% less net debt relative to net equity as a percentage of assets compared to other firms. This relationship persists within an empirical model of target leverage behavior. The effect of a downgrade is larger at downgrades to a speculative grade rating and if commercial paper access is affected. In particular, firms downgraded to speculative are about twice as likely to reduce debt as other firms. Rating upgrades do not affect subsequent capital structure activity, suggesting that firms target minimum rating levels.

Keywords: Leverage, Capital Structure, Debt, Credit Ratings, Tradeoff Theory

JEL Classification: G32

Suggested Citation

Kisgen, Darren J., Do Firms Target Credit Ratings or Leverage Levels? (October 5, 2005). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN:

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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