Ratings and Debt: an Analysis of the Link Between Credit Ratings and Capital Structure

Abstract: In this paper we analyse the link between companies' credit ratings and their capital structure. We aim to determine whether prevailing company level credit ratings affect net issuance of debt. We construct a sample from Northern European countries which consists of 7,848 firm-years from 1990 to 2018. With OLS and time fixed effects frameworks, we analyse if companies close to a rating upgrade or downgrade issue less debt to facilitate a desirable rating outcome. We perform this analysis using both broad ratings (i.e. AA, A, A) and micro ratings (i.e. AA+, AA, AA-) and find statistically and economically significant results that indicate that, in both cases, proximity to a rating change leads to lower net issuance of debt. Our analysis of upgrade and downgrade effects in isolation shows that the upgrade effect is more evident in the broad ratings while the downgrade effect is more evident in the micro ratings.