Dynamics of Debt Structure and Credit Ratings

Abstract

Using a comprehensive dataset comprising 1 863 unique U.S. firms as well as 100unique Norwegian companies in the period 2006 - 2011, we examine the dynamicsbetween corporate debt structure and credit ratings. We address especially threeconcerns related to credit ratings and their effects on debt structure decisions: Wefirst identify the effects of bond market participation, measured by having a creditrating, before we emphasize the effects of being near a change in credit rating.Last, we address how credit ratings affect corporate debt maturity structure. Theseconsiderations form the foundation for understanding what drives corporate capitalstructure.Our main findings indicate that rated firms are to a greater extent characterized bydebt heterogeneity relative to unrated firms. The difference become more apparentas credit ratings exacerbates. We find evidence that firms adjust leverage ratiosin concern of a rating change with the boundary between investment grade andnon-investment grade as most important. Finally, we observe an inverse u-shapedrelationship between credit ratings and public debt issues, with BBB rated firmshaving the longest maturities.The two markets are compared in order to capture possible similarities in debtstructure behavior. We find that U.S. and Norwegian companies behave similar interms of the priority structure of bank and bond debt. Furthermore, we identifycredit ratings as highly prominent for management of firms? debt structure and findthat regulation effects and enhanced incentives to monitor are mainly the reasonswhy debt structure decisions vary between investment grade and speculative gradedfirms.