The Impact of Credit Rating on Firms' Debt Maturity and Ownership DecisionsEvidence from UK Listed Firms

Authors Organisations
Type

Student thesis: Doctoral ThesisDoctor of Philosophy

Original languageEnglish
Awarding Institution
Supervisors/Advisors
  • Owain Maelor Ap Gwilym
  • Kevin Michael Peter Holland
Thesis sponsors
  • ORS COMMITTEE
Award date13 Nov 2013
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Abstract

This thesis investigates the impact of credit ratings on UK firms' debt maturity and ownership decisions. Two unique datasets, which combine the credit ratings data obtained from Financial Times Credit Ratings International, UK firms’ private debt data collected from their annual reports, and the accounting/market data obtained from DataStream, are created for the empirical investigations. The results show that there is a non-monotonic relationship between UK firms' credit rating status and their debt maturity. Firms with A-/A3 or higher ratings and firms with "speculative-grade” ratings use around 10% less long-term debt than firms with BBB- /Baa3 to BBB+/Baa1 ratings. In addition, downgraded firms are more likely to lengthen their debt maturity ex-post, regardless of their ex-ante credit ratings. The results also show that there is a monotonically decreasing relationship between UK firms' credit rating status and their use of bank and non-bank private debt. Even after controlling for other common determinants of debt ownership structure, a one-notch decrease in credit rating is likely to cause a 2 to 4 percent increase in the use of bank borrowing and other forms of private debt. The results from the full sample of downgraded firms show that ex post, these firms immediately increase their bank borrowing, possibly through their pre-arranged lines of credit agreements. However, the results from a sub-sample of firms being downgraded from the BBB/Baa rating category to "speculative-grade" ratings show that ex post, these firms’ bank borrowing is immediately reduced. Such a quick reduction is more likely to be the result of bank actions