Effects of credit rating changes on capital structure of Latin American firms

Abstract

This study investigates whether non-financial Latin American firms adjust their capital structure in order to maintain certain rating levels. The credit rating-capital structure (CR-CS) hypothesis suggests that firms assume less debt after rating downgrades, aiming to retrieve necessary conditions to restore a better rating. Through panel data analysis for the 2000-2014 period and by using the generalized method of moments (GMM), we show that a rating downgrade does not accelerate the speed of adjustment to the target, indicating that firms do not target minimum rating levels, as predicted by the CR-CS hypothesis. Although, rating changes are related to firms’ capital structure, we conclude that Latin American firms do not adjust their capital structure to maintain certain rating levels.

Keywords

• Capital structure
• Credit rating
• Partial adjustment
• Target leverage
• Latin American firms