Innovation and credit ratings, does it matter? UK evidence

Abstract

This study investigates the under-researched topic of credit rating predictions in the United Kingdom, using a sample of credit rated firms from FTSE 350 nonfinancial firms for the period 1999 to 2008. We aim to provide further insights regarding the credit ratings–capital structure hypothesis and to test whether innovation impacts credit ratings. We employed logit model and ordered probit analysis. Our results show that credit ratings are improved by innovation, profitability, growth, size, and reduction of leverage and business risk. However, firms with more innovation activities than internal optimum level have lower ratings. These results provide evidence that credit ratings can be viewed within the context of capital structure theory.

Keywords:

• credit ratings
• panel data
• innovation
• leverage

JEL Classification:

• C23
• C52
• E44