The Relevance of External Credit Ratings in the Capital Structure Decision-Making Process

This paper empirically examines the relevance of external credit ratings in the capital structure decision-making process with regard to an international firm sample. Using the rating outlook to measure the imminence of a rating change, allows us to test managers' ex-ante capital structure behavior more concisely than prior studies have. The results show that companies near a rating change issue 1.8% less net debt relative to net equity as a percentage of total assets than firms not near a rating change. We find that the effect is economically larger for US firms and also if access to the commercial paper market is at risk