The Empirical Research On The Impact Of Credit Ratings On Capital Structure Decisions

The capital structure theory is one of the most important subjects in corporate finance field and has been widely studied by scholars in finance world.And there has been so many capital structure theories emerging since the MM theory was published.Based on the MM theory,national and international scholars have been exploring what kind of factors affect capital structure of enterprises and how they make the effect by combining with practical experience.Meanwhile,the bond market in China has been experiencing such great development since ten years ago that the amount of total debt issuance grows very large,and participants and bond product varieties increases more and more without any sign of stopping.With the development of the bond market in China,credit rating industry also makes big progress in growing.Both bond issuers and investors are increasingly aware of the importance of credit ratings,whose influence on the capital structure of enterprises is becoming more and more significant.So as it implies,more or less,a change of one credit rating to another will definitely has some effect on the capital structure decisions.Based on this point,this paper contributes to the theoretical and empirical capital structure decision frameworks by examining the influence of credit ratings on capital structureFirst of all,this paper elaborates the selected topic background and research significance.In retrospect of those famous opinions of capital structure and how the bond market and credit ratings industry in China developed,this paper explains the significance of the study,briefly introduces the basic concepts and different business types of credit ratings,and puts forward the idea and methods of the study.Secondly,this paper carries out the literature review of the research topic.Starting with the MM theory,it briefly reviews those famous capital structure theory,and then introduces the knowledge and information of how far we have got about those study such as what kind of impact credit ratings has on the whole capital market.Thirdly,this paper puts forward the hypothesis,explains it by theoretical derivation which is how credit ratings make difference on the financing cost of a company,and then starts to describethe empirical design on the basis of the hypothesis.Lastly,this paper carries out empirical tests with Broad ratings measure and Micro ratings measure,and analyzes the results,which in this progress includes sample data mining,transferring credit ratings into dependent variables,selecting control variables,running empirical tests,and finally making conclusion based on the results.According to the tests,it is found that credit ratings have significant influence on capital structure of enterprises.In the Broad ratings measure test,the implication of the result is that firms near a rating change will have more conservative debt financing policies or more aggressive equity financing policies than firms not near a rating change,no matter whether it is a state-owned firm or not.In the Micro rating measure test,the result implies that firms near getting a higher ratings tend to take this advantage and issue more debt than equity to get financed,while if the credit ratings are going down,a state owned firm won’t care about it,but a non-state owned firm will pay more attention to its credit rating and will significantly reduce its debt issuance amount to maintain the current credit rating.