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Credit rating has for a long time been documented as an important determinant of the capital structure policy decisions. Recently, this motivation has…
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Download file to see previous pages... The survey listed credit rating as the second most important factor in organization’s capital structure policy decisions. The CR-CS model (credit rating –capital structure), as formulated by Kisgen illustrates that, the capital structure policy of any firm is influenced by its credit ratings (Kisgen, p1325). The model is a general description of the behavior of a subsample of firms. The appeal of the model varies systematically between firms as classified by some firm-level attributes.
Those attributes are examined as follows; first, a test of the sensitivity of the active firms to the capital market participation versus inactiveness to capital market participation. Second, the sensitivity of the CR-CS model in firm’s bond ratings. Third, the effect of CR-CS motivation on firms that are active participants in the commercial paper markets as compared to the inactive firms. Last, examination of the capital structure behavior in relation to investment opportunities available (Kisgen, p1325).
Reconfirming Kisgen’s findings, firms on the verge of rates change uses less debt financing margin therefore supporting the CR-CS model. However, CR-CS motivation cannot be documented to be systematically related to the attributes above. The major drawback of the model is the fact that, CR-CS model does not apply to all the rating classes. The model, as analyses indicates only holds in B-rated firms. Thus, Kisgen’s initial findings were driven by a subsample of firms with very low ratings. The usage of B-rated firms in support of the model presents a major weakness in the model. B-rated firms are associated with constant financial distresses therefore, their marginal financing behavior is influenced more by their lack of access to the debt market (Kisgen, p1331).
Additionally, the model implies that, organizations on the edge of grade rating based on investment and noninvestment should be ...Download file to see next pagesRead More
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