The association between corporate credit ratings and leverage- evidence from the U.S.
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School of Business |
Master's thesis
Authors
Date
2021
Department
Major/Subject
Mcode
Degree programme
Accounting
Language
en
Pages
58+0
Series
Abstract
Credit ratings, as the evaluations of the creditworthiness of debt issuers, mitigate the adverse impacts of information asymmetry between the firms and external investors. Therefore, they have gradually become essential financial tools for investors in different financial markets. At the same time, it has been proved that credit ratings are considered as the second vital determinants when managers are making the choice of investments financing. In this study, the relationship between credit ratings and leverage ratios is examined to understand how credit ratings influence the firms’ capital structures. This study is based on the data gathered from Compustat North America database, including 21786 observations of 2687 listed firms in the U.S. from 1996 to 2006. OLS technique is applied to perform the statistical analysis. Empirical results show a negative relationship between credit ratings and leverage ratios, indicating that firms with better credit ratings have lower levels of debt financing than low-rated firms. When firms are classified into investment-grade and speculative-grade, it is shown that investment-grade firms have lower leverage ratios than firms graded as speculative. The findings back up the two hypotheses that were put forward in this study and give support to pecking-order theory.Description
Thesis advisor
Jarva, HenryKeywords
credit rating, leverage ratio, capital structure, trade-off theory, pecking-order theory