This paper examines the impact of credit rating management behavior in determining
optimal capital structure with a system of rating transition multi-boundaries. We
propose contingent claim models that capture firms’ empirical behavior in threefold:
the behavior as targeting initial rating, the behavior as linking firm’s rating to the
promised coupons, and the behavior as targeting minimum rating. We show that, if the
policy targets a better initial rating, the firm is usually underleveraged. As long as the
rating at issuing time is not too low, tax shields of rating-linked coupon debt are larger
than those of standard debt with same par, and hence optimal leverage usage of firm
having rating-linked coupon scheme is greater. Further, our result also indicates that
the behavior as targeting minimum rating account for mean reversion in leverage
dynamics. Following a downgrade from target minimum rating, managers appear to
make over-repurchase choices for adjusting current rating back to initial target.
JEL Classification: G3, G32, G33
Keywords: optimal leverage, target initial credit rating, rating-linked coupon debt,
target minimum rating.
학술대회/행사
학술대회안내
[2008년 제 4차] How Does Credit Rating Management Behavior Impact O
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게시일 :
2008-12-11