Research Journal of Applied Sciences

Year: 2015
Volume: 10
Issue: 10
Page No. 536 - 542

Does Capital Structure React Similarly to Probable and Real Credit Rating Changes?

Authors : Afef Feki Krichene and Walid Khoufi

Abstract: This study examines whether the effects of probable and real credit rating changes on capital structure decision making are similar. Tests are investigated for 292 American firms listed on the S&P 500 index from 2007-2010. The results show that the both effects are significant in the capital structure decision making. However, capital structure reactions to probable and real credit rating changes aren’t similar. While capital structure reactions are similar for real and probable downgrades to the speculative grade, capital structure reactions aren’t similar for real and probable upgrades to the investment grade. Firms close to an upgrade/downgrade will issue less debt relative to equity to either avoid a downgrade or to increase the chances of an upgrade. Firms receiving a downgrade will reduce their debt issuance in the following year in order to reach again the investment grade. However, once the investment grade reached, firms will increase again their debt issues without fear of being downgraded again.

How to cite this article:

Afef Feki Krichene and Walid Khoufi, 2015. Does Capital Structure React Similarly to Probable and Real Credit Rating Changes?. Research Journal of Applied Sciences, 10: 536-542.

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