Capital structure and corporate credit ratings
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Schou-Jensen, Maja1, Forfatter
Norman Sørensen, Peter 2, Vejleder
1Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7001              
2Økonomisk Institut, Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7014              
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Ukontrollerede emneord: Capital structure, trade-off theory, pecking order theory, corporate credit ratings
 Abstract: If credit ratings decrease asymmetric information costs and cash flow volatility, the pecking order theory will predict that rated firms will issue more debt. However, given that firms have credit ratings, higher ratings are associated with larger cash flows, which enable the firms to use internal cash to fund investments and thereby decrease leverage. The implications of corporate credit ratings in the trade-off and pecking order theories are equivalent, even though the underlying assumptions differ. This leads to two testable hypotheses:
Hypothesis 1: Firms with corporate credit ratings have significantly more leverage than firms without.
Hypothesis 2: Firms with higher corporate credit ratings have relatively lower leverage than firms with lower corporate credit ratings.
In the second part of the thesis, both hypotheses are tested using two existing models and an alternative econometric model proposed in this thesis. The models consistof panel data regressions, Fama-Macbeth two-step regressions as well as dynamic panel data regressions. The models are tested on 616 Nordic firms listed on Nasdaq and 448 American firms from S&P 500. The results indicate that corporate credit ratings have explanatory power for capital structure when tested empirically. Hypothesis 1 is largely confirmed by the Nordic and American data. Firms holding a credit rating, modeled by a credit rating dummy, have significantly more leverage than those without. Hypothesis 2 is confirmed by most tests and is strongest supported by data on the American firms. Results for Hypothesis 2 generally supports that better rated firms, modeled by a number indicating the credit rating quality, have relatively less leverage.
The overall conclusion from the theoretical and empirical analyses is that corporate credit ratings do affect capital structure. Having a credit rating implies larger leverage, and given that the firm is rated a better rating quality implies relatively lower leverage. The effect is more pronounced for American firms, which is due to limited number of Nordic firms with ratings, the relatively smaller size of Nordic firms compared to the S&P 500 firms and that the Nordic firms have structurally different leverage sources.
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Bogmærk denne post:
 Type: Speciale
Alternativ titel: How is capital structure affected by corporate credit ratings?
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Sprog: English - eng
 Datoer: 2013-04-30
 Sider: -
 Publiceringsinfo: København : Københavns Universitet
 Indholdsfortegnelse: 1 Introduction 1
2 Theory 4
2.1 Trade-off Theory 4
2.2 Pecking order theory 10
2.3 Conclusion of the trade-off and pecking order theory 16
2.4 Credit rating 16
2.5 Introducing credit rating theory to the pecking order and trade-off theories 22
2.6 Concluding remarks on theory 25
3 The econometric models 27
3.1 Previous credit rating empirical research 27
3.2 Shyam-Sunder & Myers, 1999 28
3.3 Fama & French, 2002 30
3.4 Alternative model 32
3.5 Methodologies 33
3.6 Leverage 37
3.7 Market value or book value 38
3.8 Sub conclusion 40
4 Data 41
4.1 Panel data characteristics and implications 41
4.2 Ratings 42
4.3 Descriptive analysis 42
4.4 Critique of data 45
5 Results 48
5.1 Firm characteristics across ratings 48
5.2 Results for Shyam-Sunder & Myers, 1999 50
5.3 Results for Fama & French, 2002 Models 56
5.4 Results for alternative model 61
5.5 Sub conclusion 65
6 Discussion 66
6.1 Time period 68
6.2 Firm size 69
6.3 Source of capital 70
7 Conclusion 72
8 Literature 74
9 Appendix 77
 Note: -
 Type: Speciale
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