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Credit Rating as a Mechanism for Capital Structure Optimization: Empirical Evidence from Panel Data Analysis

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  • Faiza Sajjad

    (Department of Management Sciences, COMSATS Institute of Information Technology, Abbottabad 22010, Pakistan)

  • Muhammad Zakaria

    (Department of Management Sciences, COMSATS Institute of Information Technology, Islamabad 44000, Pakistan)

Abstract

This paper empirically examines the significance of credit ratings for optimal capital structure decisions. Non-financial Asian listed companies, evaluated by Standard and Poor’s, are selected from 2000 to 2016. Panel data analysis with pooled ordinary least square (OLS), fixed effect (FE), and generalized method of moment (GMM) estimation techniques are employed to test the effect of each credit rating scale on capital structure choices. For the problem of heteroskedasticity in OLS, the heteroskedastic white consistent variance is used for the best fit of the model. Findings of all estimation techniques show that the relationship between credit rating scales and leverage ratio is a non-linear inverted U shape. High- and low-rated companies have a low level of leverage, whereas mid-rated companies have a high level of leverage. It is evident that costs and benefits of each rating scale have a substantial effect on the behavior of a company’s choices for optimal capital structure. The study suggests that policymakers, investors, and financial officers should consider credit rating as an important measure of financing decisions.

Suggested Citation

  • Faiza Sajjad & Muhammad Zakaria, 2018. "Credit Rating as a Mechanism for Capital Structure Optimization: Empirical Evidence from Panel Data Analysis," IJFS, MDPI, vol. 6(1), pages 1-14, January.
    • Handle: RePEc:gam:jijfss:v:6:y:2018:i:1:p:13-:d:128713
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    Cited by:

    1. Mundi, Hardeep Singh, 2022. "CEO social capital and capital structure complexity," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    2. Faiza Sajjad & Muhammad Zakaria, 2018. "Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure," JRFM, MDPI, vol. 11(2), pages 1-16, May.
    3. Kamran Ahmed Siddiqui & Ishtiaq Ahmed Bajwa & Faisal Al-Hudithi & Tarig Eltayeb & Asma Khatoon & Suliman Bawardi, 2021. "Entrepreneurs' opinion towards credit rating in Saudi Arabia," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 9(2), pages 186-197, December.
    4. Rana Abdelhafeez Feda, 2020. "The Impact of Credit Ratings on Firms Capital Structure," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 92-101.

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