Do Credit Ratings Determine Capital Structure?

Figures & data

Figure 1. Number of Rated UK firms from 1989 to 2010. Source: S&P Ratings Direct and Fitch Ratings

Table 1. Differences in leverage and other firm characteristics between firms with access (A) and without access (NA).

	Rated	N	Non-rated	N	Mean difference (A − NA)	Mean Test A vs. NA	Median Test A vs. NA
	(1)	(2)	(3)	(4)	(5)	(6)	(7)
Panel A: Access is measured by credit rating
Market leverage	0.2763	1367	0.2014	6321	0.0749***	A > NA***	A > NA***
Book leverage	0.2993	1316	0.2074	5996	0.0919***	A > NA***	A > NA***
Size	15.4343	1367	12.7424	6348	2.6919***	A > NA***	A > NA***
Age	3.5515	1367	3.2215	6435	0.3300***	A > NA***	A > NA***
Asset tangibility	0.6604	1324	0.5214	5970	0.1391***	A > NA***	A > NA***
R&D spending	−0.0438	1299	−0.0162	5881	−0.0276***	A < NA***	A > NA
Market-to-book	0.1332	1316	0.2396	5986	−0.1065***	A < NA***	A < NA***
Profitability	0.1203	1343	0.0941	6224	0.0261***	A > NA***	A > NA***
Asset volatility	0.2168	1345	0.2636	6046	−0.0468***	A < NA***	A < NA***
Equity return	0.0311	1359	0.0225	6109	0.0086***	A > NA***	A < NA
Short-term debt	0.2475	1311	0.3673	5601	−0.1198***	A < NA***	A < NA***
Tax paid	0.2563	1317	0.2453	5991	0.0110	A > NA	A < NA
	Access	N	No access	N	Mean difference	A vs. NA	Median test
Panel B:
1. Access is measured by size (Top 30% vs. Remaining 70% of firms by the size distribution)
Market leverage	0.2915	1812	0.2040	5470	0.0874***	A > NA***	A > NA***
Book leverage	0.2779	1811	0.2062	5457	0.0717***	A > NA***	A > NA***
	Access	N	No access	N	Mean difference	A vs. NA	Median test
2. Access is measured by size (Top 30% vs. Bottom 30% of firms by the size distribution)
Market leverage	0.2917	1809	0.1351	1804	0.1566***	A > NA***	A > NA***
Book leverage	0.2779	1808	0.1442	1804	0.1337***	A > NA***	A > NA***
	Access	N	No access	N	Mean difference	R vs. NR	Median test
3. Access is measured by Rated vs. Bottom 30% of Firms by the size distribution
Market leverage	0.2763	1367	0.1333	1794	0.1430***	A > NA***	A > NA***
Book leverage	0.2993	1316	0.1428	1794	0.1565***	A > NA***	A > NA***

The table reports the results from univariate independent sample t-tests for the sample of UK listed non-financial firms with and without the public debt access for the period from 1989–2010 and contains firm-year observations with positive debt only. Access to debt market is measured by: (1) the possession of long-term corporate credit rating (Panel A); (2) Firm size based on the Top 30% and the Remaining70% of firms by the size distribution (Panel B1); (3) Firm size based on the Top 30% and the Bottom 30% of firms by the size distribution (Panel B2); (4) the possession of credit rating and firms in the bottom 30% of firms by the size distribution (Panel B3). Mean values are reported. The fifth column reports mean differences between firms with and without access. The last column (7) reports median test for the differences between firms with and without access. A—Access; NA—No Access.

*** indicates statistical significance at 1% level, **5% level, *10% level.

Table 2. The impact of bond market access (measured by credit rating) on leverage: Pooled OLS and panel estimation methods.

	(1)	(2)	(3)	(4)	(5)	(6)
Variables	OLS	FE	RE	OLS	FE	RE
Credit rating	0.0343***	0.0432**	0.0462***	0.0307***	0.0400**	0.0416***
	(0.013)	(0.017)	(0.015)	(0.011)	(0.017)	(0.014)
Size	−0.0017	−0.0152***	−0.0054
	(0.004)	(0.005)	(0.004)
Age	0.0107**	0.0763***	0.0358***	0.0103**	0.0590***	0.0322***
	(0.005)	(0.012)	(0.006)	(0.005)	(0.011)	(0.006)
Profitability	−0.2165***	−0.1864***	−0.1888***	−0.2179***	−0.1898***	−0.1907***
	(0.018)	(0.017)	(0.016)	(0.017)	(0.017)	(0.016)
Asset tangibility	0.0974***	0.1174***	0.1156***	0.0951***	0.0930***	0.1066***
	(0.024)	(0.026)	(0.021)	(0.024)	(0.025)	(0.020)
R&D Expenditure	0.0047	0.0030	0.0019	0.0051	0.0038	0.0024
	(0.004)	(0.004)	(0.004)	(0.004)	(0.004)	(0.004)
Market-to-book	−0.0143***	−0.0013	−0.0056**	−0.0145***	−0.0045*	−0.0066***
	(0.002)	(0.003)	(0.002)	(0.002)	(0.002)	(0.002)
Equity return	−0.1040***	−0.1040***	−0.1029***	−0.1046***	−0.1063***	−0.1040***
	(0.006)	(0.005)	(0.005)	(0.006)	(0.005)	(0.005)
Asset volatility	−0.3798***	−0.2812***	−0.2960***	−0.3795***	−0.2862***	−0.2977***
	(0.029)	(0.023)	(0.022)	(0.029)	(0.024)	(0.022)
Short-term debt	−0.0890***	−0.0582***	−0.0642***	−0.0876***	−0.0524***	−0.0615***
	(0.011)	(0.011)	(0.010)	(0.011)	(0.011)	(0.010)
Tax paid	−0.0367***	−0.0199***	−0.0220***	−0.0372***	−0.0213***	−0.0226***
	(0.009)	(0.006)	(0.006)	(0.009)	(0.006)	(0.006)
Market return	−0.0529***	−0.0469***	−0.0515***	−0.0521***	−0.0461***	−0.0507***
	(0.011)	(0.009)	(0.009)	(0.011)	(0.009)	(0.009)
GDP growth	−0.0120***	−0.0126***	−0.0130***	−0.0121***	−0.0134***	−0.0132***
	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)	(0.001)
Constant	0.3375***	0.2533***	0.2372***	0.3170***	0.1298***	0.1829***
	(0.046)	(0.056)	(0.047)	(0.025)	(0.038)	(0.027)
Observations	6,479	6,479	6,479	6,480	6,480	6,480
R-squared	0.4868	0.3902		0.4867	0.3861
F test	68.0108	82.2034		70.3357	88.1287
Prob > F	0.0000	0.0000		0.0000	0.0000
Number of firmid		475	475		475	475
Chi2 test			1501.9098			1490.8588
Prob > Chi2			0.0000			0.0000

The table presents estimates of Eq. (1)(1) $$Leverag{e}_{it}={\alpha }_0+{\alpha }_{1}CreditRating+{\beta }_1{X}_{it}+{\beta }_{2}GD{P}_t+{\beta }_{3}FTSEALLS{H}_t+{\beta }_{4}I{D}_i+{\epsilon }_{it}$$(1) using annual data of UK listed non-financial firms for the period from 1989 to 2010. Columns 1 and 4 report results from pooled OLS, columns 2 and 5 report results from fixed effects and columns 3 and 6 report results from random effects. The dependent variable is the ratio of total debt to the market value (MV) of assets. Total debt incorporates short-term debt and long-term debt. MV of assets is the sum of MV of equity and BV of total debt. Public bond market access is proxied by the possession of a long-term corporate credit rating. All variables are winzorised at 1% level in order to prevent potential outliers driving the results. All specifications include annual stock market return and annual GDP growth rate to control for macroeconomic conditions. Annual stock market return is calculated as natural logarithm of FTSE at the end of the year over FTSE at the beginning of the year. Annual GDP growth rate is sourced from the IMF official website. Industry dummies are included across all specifications to control for industry-specific effects. Variables definitions are presented in Appendix 1. Standard errors (in parenthesis) are adjusted for heteroskedasticity and clustering by firms.

***, **, * indicate statistical significance at 1%, 5%, and 10% levels respectively.

Table 3. The impact of access (measured by Size30–Remaining70, Size30–Bottom30, Rated—Small 30%) on leverage: Pooled OLS and panel estimation methods.

	(1) Top30%–vs.70%	(2) Top30%–vs.70%	(3) Top30%–vs.70%	(4) Top30%–vs.30%	(5) Top30%–vs.30%	(6) Top30%–vs.30%	(7) Rated—vs.30%	(8) Rated—vs.30%	(9) Rated—vs.30%
Variables	OLS	FE	RE	OLS	FE	RE	OLS	FE	RE
Top30%–Remaining70%	0.0218**	0.0139	0.0177**
	(0.010)	(0.009)	(0.008)
Top30%–Bottom30%				0.0440***	−0.0255	0.0204*
				(0.014)	(0.016)	(0.012)
Rated—Small30%							0.0571***	0.0759	0.0717***
							(0.016)	(0.053)	(0.020)
Age	0.0110**	0.0650***	0.0354***	0.0143**	0.0867***	0.0477***	0.0089	0.0452***	0.0261***
	(0.005)	(0.011)	(0.006)	(0.007)	(0.016)	(0.008)	(0.008)	(0.016)	(0.008)
Profitability	−0.2153***	−0.1892***	−0.1897***	−0.2066***	−0.1665***	−0.1705***	−0.1709***	−0.1479***	−0.1503***
	(0.018)	(0.017)	(0.016)	(0.021)	(0.022)	(0.021)	(0.022)	(0.023)	(0.021)
Asset tangibility	0.0945***	0.0928***	0.1072***	0.0879***	0.0344	0.0711***	0.0832***	0.0350	0.0683**
	(0.023)	(0.025)	(0.020)	(0.033)	(0.033)	(0.027)	(0.029)	(0.035)	(0.028)
R&D expenditure	0.0049	0.0038	0.0022	0.0044	−0.0009	−0.0018	0.0035	−0.0019	−0.0018
	(0.004)	(0.004)	(0.004)	(0.006)	(0.005)	(0.005)	(0.006)	(0.006)	(0.006)
Market-to-book	−0.0140***	−0.0043*	−0.0064***	−0.0094***	−0.0015	−0.0035	−0.0104***	−0.0035	−0.0050**
	(0.002)	(0.002)	(0.002)	(0.002)	(0.003)	(0.002)	(0.002)	(0.002)	(0.002)
Equity return	−0.1046***	−0.1058***	−0.1035***	−0.1026***	−0.0952***	−0.0957***	−0.0977***	−0.0903***	−0.0909***
	(0.006)	(0.005)	(0.005)	(0.009)	(0.007)	(0.007)	(0.008)	(0.007)	(0.007)
Asset volatility	−0.3770***	−0.2858***	−0.2966***	−0.3769***	−0.2755***	−0.2969***	−0.3335***	−0.2575***	−0.2719***
	(0.029)	(0.023)	(0.022)	(0.039)	(0.031)	(0.029)	(0.037)	(0.032)	(0.030)
Short-term debt	−0.0885***	−0.0523***	−0.0622***	−0.0635***	−0.0221	−0.0352***	−0.0756***	−0.0272*	−0.0376***
	(0.011)	(0.011)	(0.010)	(0.015)	(0.014)	(0.013)	(0.015)	(0.014)	(0.013)
Tax paid	−0.0384***	−0.0215***	−0.0230***	−0.0446***	−0.0152	−0.0178*	−0.0481***	−0.0162*	−0.0199**
	(0.009)	(0.006)	(0.006)	(0.013)	(0.010)	(0.010)	(0.012)	(0.009)	(0.009)
Market return	−0.0554***	−0.0496***	−0.0544***	−0.0344**	−0.0565***	−0.0539***	−0.0169	−0.0434***	−0.0371***
	(0.011)	(0.009)	(0.009)	(0.016)	(0.013)	(0.013)	(0.017)	(0.013)	(0.013)
GDP growth	−0.0119***	−0.0131***	−0.0130***	−0.0118***	−0.0122***	−0.0122***	−0.0130***	−0.0136***	−0.0135***
	(0.001)	(0.001)	(0.001)	(0.002)	(0.001)	(0.001)	(0.002)	(0.002)	(0.002)
Constant	0.3136***	0.1127***	0.1747***	0.2759***	0.0655	0.1302***	0.2867***	0.1482**	0.1753***
	(0.025)	(0.038)	(0.027)	(0.034)	(0.057)	(0.037)	(0.039)	(0.062)	(0.040)
Observations	6,457	6,457	6,457	3,091	3,091	3,091	2,613	2,613	2,613
R-squared	0.4859	0.3840		0.5009	0.3842		0.5065	0.3800
F test	70.7048	85.3545		48.2140	39.0770		41.9159	34.6547
Prob > F	0.0000	0.0000		0.0000	0.0000		0.0000	0.0000
Number of firmid		475	475		395	395		340	340
Chi2 test			1479.8042			971.2653			882.5157
Prob > Chi2			0.0000			0.0000			0.0000

The table presents estimates of Eq. (1)(1) $$Leverag{e}_{it}={\alpha }_0+{\alpha }_{1}CreditRating+{\beta }_1{X}_{it}+{\beta }_{2}GD{P}_t+{\beta }_{3}FTSEALLS{H}_t+{\beta }_{4}I{D}_i+{\epsilon }_{it}$$(1) using annual data of UK listed non-financial firms for the period from 1989 to 2010. Columns 1, 4 and 7 report results from pooled OLS, columns 2, 5 and 8 report results from fixed effects and columns 3, 6 and 9 report results from random effects. Public bond market access is proxied by a firm size dummy. Columns 1–3 present results where access is measured by Top30%–Remaining70%; columns 4–5 present results where access is measured by Top30%–Bottom30%; columns 7–9 present results where access is measured by Rated—Small30%. The dependent variable is the ratio of total debt to the market value (MV) of assets. Industry dummies are included across all OLS and RE specifications to control for industry-specific effects. Variables definitions are presented in Appendix 1. Standard errors (in parenthesis) are adjusted for heteroskedasticity and clustering by firms.

***, **, * indicate statistical significance at 1%, 5%, and 10% levels respectively.

Table 4. Instrumenting for having a rating: 2SLS IV regression (probit based method and method based on linear regression in the first stage).

VARIABLES	(1) Probit	(2) Probit	(3) IV 2nd stage	(4) IV 2nd stage	(5) Linear regression	(6) Linear regression
Industry	3.9792***
	(0.314)
Log industry		5.5139***
		(0.415)
Top30%	1.4348***	1.4391***
	(0.054)	(0.055)
ADR	0.7696***	0.7788***
	(0.056)	(0.057)
Credit rating			0.0570***	0.0569***	0.0678***	0.0665***
			[0.008]	[0.008]	[0.008]	[0.008]
Age	0.0939***	0.0934***	0.0079***	0.0079***	0.0072***	0.0073***
	(0.027)	(0.027)	[0.002]	[0.002]	[0.002]	[0.002]
Asset tangibility	0.0868	0.0616	0.0934***	0.0934***	0.0916***	0.0918***
	(0.129)	(0.130)	[0.009]	[0.009]	[0.009]	[0.009]
R&D expenditure	−0.0080	−0.0054	0.0081*	0.0081*	0.0082*	0.0082*
	(0.069)	(0.069)	[0.004]	[0.004]	[0.004]	[0.004]
Market-to-book	0.0156	0.0178	−0.0949***	−0.0949***	−0.0949***	−0.0949***
	(0.051)	(0.052)	[0.004]	[0.004]	[0.004]	[0.004]
Profitability	0.6324***	0.6415***	−0.1657***	−0.1657***	−0.1668***	−0.1667***
	(0.153)	(0.154)	[0.013]	[0.013]	[0.013]	[0.013]
Short-term debt	−0.3154***	−0.3034***	−0.0789***	−0.0789***	−0.0777***	−0.0779***
	(0.094)	(0.094)	[0.006]	[0.006]	[0.006]	[0.006]
Equity return	−0.0029	−0.0049	−0.0749***	−0.0749***	−0.0749***	−0.0749***
	(0.065)	(0.065)	[0.006]	[0.006]	[0.006]	[0.006]
Assets volatility	−0.0364	−0.0696	−0.3422***	−0.3422***	−0.3418***	−0.3418***
	(0.215)	(0.216)	[0.017]	[0.017]	[0.017]	[0.017]
Tax paid	−0.1060	−0.1015	−0.0347***	−0.0347***	−0.0348***	−0.0347***
	(0.077)	(0.077)	[0.006]	[0.006]	[0.006]	[0.006]
Market return	0.0619	0.0793	−0.0400***	−0.0400***	−0.0394***	−0.0395***
	(0.158)	(0.159)	[0.012]	[0.012]	[0.012]	[0.012]
GDP	0.0269**	0.0262**	−0.0080***	−0.0080***	−0.0080***	−0.0080***
	(0.013)	(0.013)	[0.001]	[0.001]	[0.001]	[0.001]
Constant	−3.3785***	−3.6041***	0.2784***	0.2784***	0.2785***	0.2785***
	(0.195)	(0.201)	[0.012]	[0.012]	[0.012]	[0.012]
Observations	6,463	6,463	6,463	6,463	6,463	6,463
LR Chi-2	2653.9668	2672.4584
Prob Chi-2	0.0000	0.0000
Pseudo R2	0.4194	0.4223
R-squared			0.5350	0.5351	0.5325	0.5329
F-stat			248.8649	249.0389	248.7270	248.8201
craggF			3577.6281	3633.4023	1049.4746	1052.6965
Hansen J					94.851	17.319
Chi-sq P-value					0.0000	0.0000
F-stat					684.79	696.11
P-value					0.0000	0.0000
AP Chi-sq					2062.35	2096.45
P-value					0.0000	0.0000
AP F					684.79	696.11
AP R-squared					0.3284	0.3291
Shea R-squared					0.3284	0.3291

The table presents results from estimating an IV regression using two alternative methods: 1.using a probit based method in the first stage and 2. using a linear regression for the first stage. In columns 1 and 2 we report results from the first stage probit regression, where credit rating dummy is the dependent variable, which is regressed on firm-level factors and instruments. Instruments are (1) the percentage of firms in a given industry with a credit rating; (2) whether the firm is in the top 30% of firms according to market capitalisation; (3) whether it is cross-listed in the United States. In columns 3 and 4 we report results from the second stage regression, where the firm’s leverage is regressed onto the predicted probability values for credit rating variable from the first stage probit regressions and firm-level factors. In columns 5 and 6 we report results from the second method of IV estimation based on linear regression in the first stage.

Table 5. Treatment effects model: MLE and two-step estimation methods.

	(1) Probit	(2) 2nd stage	(3) Probit	(4) 2nd stage	(5) Probit	(6) 2nd stage	(7) Probit	(8) 2nd stage
variables	Log industry Top30% ADR	MLE	Industry Top30% ADR	MLE	Log industry Top30% ADR	Two step	Industry Top30% ADR	Two step
Credit rating		0.0510***		0.0497***		0.0485***		0.0474***
		[0.009]		[0.009]		[0.008]		[0.008]
Age	0.1623***	0.0080***	0.1589***	0.0081***	0.1652***	0.0082***	0.1617***	0.0083***
	[0.025]	[0.002]	[0.025]	[0.002]	[0.025]	[0.002]	[0.025]	[0.002]
Asset tang.	−0.0043	0.0950***	−0.0281	0.0953***	0.0314	0.0953***	0.0051	0.0955***
	[0.106]	[0.009]	[0.107]	[0.009]	[0.106]	[0.009]	[0.106]	[0.009]
R&D expend.	0.0292	0.0079	0.0275	0.0079	0.0273	0.0079	0.0259	0.0079
	[0.068]	[0.005]	[0.068]	[0.005]	[0.068]	[0.005]	[0.068]	[0.005]
Market-to-book	−0.0126	−0.0949***	−0.0059	−0.0950***	−0.0025	−0.0949***	0.0037	−0.0950***
	[0.046]	[0.003]	[0.047]	[0.003]	[0.046]	[0.003]	[0.046]	[0.003]
Profitability	0.6169***	−0.1652***	0.6139***	−0.1650***	0.6096***	−0.1649***	0.6081***	−0.1648***
	[0.151]	[0.010]	[0.152]	[0.010]	[0.150]	[0.010]	[0.150]	[0.010]
Short-term debt	−0.3911***	−0.0794***	−0.3950***	−0.0795***	−0.3785***	−0.0797***	−0.3827***	−0.0798***
	[0.091]	[0.006]	[0.091]	[0.006]	[0.091]	[0.006]	[0.091]	[0.006]
Equity return	−0.0479	−0.0748***	−0.0506	−0.0748***	−0.0238	−0.0748***	−0.0272	−0.0748***
	[0.059]	[0.004]	[0.059]	[0.004]	[0.057]	[0.004]	[0.057]	[0.004]
Assets vol.	−0.1876	−0.3421***	−0.2009	−0.3422***	−0.1007	−0.3422***	−0.1166	−0.3423***
	[0.203]	[0.013]	[0.204]	[0.013]	[0.200]	[0.013]	[0.201]	[0.013]
Tax paid	−0.1039	−0.0346***	−0.1048	−0.0346***	−0.1015	−0.0346***	−0.1021	−0.0346***
	[0.075]	[0.005]	[0.075]	[0.005]	[0.075]	[0.005]	[0.075]	[0.005]
Allsharereturn		−0.0406***		−0.0406***		−0.0406***		−0.0407***
		[0.011]		[0.011]		[0.011]		[0.011]
GDP_IMF		−0.0078***		−0.0078***		−0.0078***		−0.0078***
		[0.001]		[0.001]		[0.001]		[0.001]
Industry	2.7576***				2.6594***
	[0.182]				[0.179]
Log industry			3.6277***				3.5188***
			[0.231]				[0.228]
Top30%	1.3378***		1.3413***		1.3703***		1.3713***
	[0.054]		[0.054]		[0.052]		[0.052]
ADR	0.6689***		0.6693***		0.6494***		0.6505***
	[0.052]		[0.052]		[0.052]		[0.052]
Constant	−2.6500***	0.2761***	−2.7150***	0.2760***	−2.6985***	0.2764***	−2.7603***	0.2763***
	[0.142]	[0.012]	[0.143]	[0.012]	[0.141]	[0.012]	[0.142]	[0.012]
Athrho		−0.1361***		−0.1285***
		[0.045]		[0.045]
lnsigma		−2.0209***		−2.0211***
		[0.009]		[0.009]
Observations	6,463	6,463	6,463	6,463	6,463	6,463	6,463	6,463
Wald $^2$	7485.2123	7485.2123	7486.0261	7486.0261	7570.6348	7570.6348	7568.7872	7568.7872
Prob < $^2$	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000
LR $^2$	9.6302	9.6302	8.6208	8.6208
Prob < $^2$	0.0019	0.0019	0.0033	0.0033
Hazard (lambda)						−0.0159***		−0.0151***
						[0.0054]		[0.0054]
Rho	−0.1353	−0.1353	−0.1278	−0.1278	−0.1199	−0.1199	−0.1138	−0.1138
Sigma	0.1325	0.1325	0.1325	0.1325	0.1325	0.1325	0.1325	0.1325
Lambda	−0.0179	−0.0179	−0.0169	−0.0169	−0.0159	−0.0159	−0.0151	−0.0151
SeLambda	0.0059	0.0059	0.0059	0.0059	0.0054	0.0054	0.0054	0.0054

The table reports results of the treatment effect model estimated by a maximum likelihood and a two-stage method. Columns 1–4 report results from a treatment model MLE and columns 5–8 report results from a treatment model two-stage. Results from both the selection equation and regression equation are presented. Results from the selection equation are presented in the preceding column of the regression equation.

*, **, *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.