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How does credit rating migration impacts an optimal capital structure decision?

This paper examines the impact of credit rating migration in determining optimal capital structure. The models we propose capture empirical behavior in two ways; the behavior of linking firm¡¦s rating to the promised coupons and the behavior of targeting minimum rating. We find that as long as the rating at issuing time is not too low, tax shields of the rating-linked coupon debt are larger than those of standard debt with the same par, and hence, optimal leverage usage of the firm with the rating- linked coupon scheme is greater. Further, we also show that the behavior of targeting a minimum rating causes mean-reverting leverage dynamics. Managers are appeared to make over-repurchase choices for adjusting the current rating back to the initial target following a downgrade from target minimum rating.

Identiferoai:union.ndltd.org:NSYSU/oai:NSYSU:etd-1207109-131432
Date07 December 2009
CreatorsChen, Chang-chih
ContributorsSo-De Shyu, Yu-Chuang Huang, Chou-Wen Wang, Shih-Kuei Lin, Hsiou-Jen Kuo
PublisherNSYSU
Source SetsNSYSU Electronic Thesis and Dissertation Archive
LanguageEnglish
Detected LanguageEnglish
Typetext
Formatapplication/pdf
Sourcehttp://etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd?URN=etd-1207109-131432
Rightsrestricted, Copyright information available at source archive

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