The role of credit ratings on capital structure and its speed of adjustment: preliminary evidence from 19 countries

In this study we examine the role of external corporate credit ratings in explaining leverage and the speed of adjustment using an international dataset. We find that the impact of credit ratings (CRs) on firms’ capital structures is more significant and negative in countries with more market-based (MB) oriented financial systems when quantified by a Financial Architecture variable (measuring the size, activity, and efficiency of a stock market compared to the banking system of the country annually), but not when measured by the traditional division into MB and bank-based (BB) oriented countries. Furthermore, the relation between the CRs and firms’ leverage ratios is significantly stronger for companies operating in advanced countries than for companies operating in developing economies. Our analysis shows that CRs play a more significant role in explaining leverage in the U.S. than in the other 18 countries we analyze. We find that companies with poorer CRs display a faster speed of adjustment towards a desired level of leverage. This happens regardless of the financial orientation or economic development of a country.