The impact of credit ratings on capital structure

Year: 2019

This publication is part of the journal (2011-2)

Purpose – The purpose of this paper is to empirically investigate the effect of real credit ratings change on

capital structure decisions.

Design/methodology/approach – The study uses three models to examine the impact of credit rating on

capital structure decisions within the framework of credit rating-capital structure hypotheses (broad rating, notch

rating and investment or speculative grade). These hypotheses are tested by multiple linear regression models.

Findings – The results demonstrate that firms issue less net debt relative to equity post a change in the

broad credit ratings level (e.g. a change from A- to BBB.). The findings also show that firms are less

concerned by notch ratings change as long the firms remain the same broad credit rating level. Moreover, the

paper indicates that firms issue less net debt relative to equity after an upgrade to investment grade.

Research limitations/implications – The study covers the periods of 2009 to 2016; therefore, the

research result may be affected by the period specific events such as the European debt crisis. Moreover,

studying listed non-financial firms only in the Tadawul Stock Exchange has resulted in small sample which

may not be adequate enough to reach concrete generalization. Despite the close proximity between the GCC

countries, there could be jurisdictional difference due to country specific regulations, policies or financial

development. Therefore, it will be interesting to conduct a cross country study on the GCC to see if the

conclusions can be generalized to the region.

Originality/value – The paper contributes to the literature by testing previous researches on new context

(Kingdom of Saudi Arabia, KSA) which lack sophisticated comparable studies to the one conducted on other

regions of the world. The results highlight the importance of credit ratings for the decision makers who are

required to make essential decisions in areas such as financing, structuring or operating firms and regulating

markets. To the best of the authors’ knowledge, this is the first study of its kind that has been applied on the

GCC region.


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