Credit watch and capital structure
Kristopher J. Kemper and
Ramesh Rao ()
Applied Economics Letters, 2013, vol. 20, issue 13, 1202-1205
We study the capital structure reactions of firms that have been added to Standard & Poor's (S&P's) CreditWatch list in order to test the role of credit ratings in firm financial decisions. Survey evidence by Graham and Harvey (2001) indicates that Chief Financial Officers (CFOs) consider credit ratings as the second most important determinant of financing policy. If credit ratings are indeed important, we should observe that firms facing a potential downgrade should react by reducing debt financing in an attempt to avert the potential rating downgrade. In the case of a potential upgrade, we should also observe a scaling back of debt financing to reinforce the rating upgrade. We find evidence for the latter but for potential downgrade firms, contrary to expectations; we find that these firms issue more debt relative to equity. Overall, we conclude that while credit ratings may be a consideration in determining corporate financing policy, it is probably a secondary determinant.
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:20:y:2013:i:13:p:1202-1205
Ordering information: This journal article can be ordered from
Access Statistics for this article
Applied Economics Letters is currently edited by Anita Phillips
More articles in Applied Economics Letters from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().