Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure

Faiza Sajjad,Muhammad Zakaria

doi:10.3390/jrfm11020024

Faiza Sajjad, Muhammad Zakaria

Open Access

https://doi.org/10.3390/jrfm11020024

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Abstract

The purpose of this study is to examine the relationship between credit rating scales and debt maturity choices. A liquidity hypothesis is used to formulate the testable proposition and conceptual framework. Generalized linear model (GLM) and pooled ordinary least square (OLS) are utilized by SAS programming to test the proposed hypothesis. Other different estimation techniques are also used for robust evidence. Results suggest that companies with high and low ratings have a shorter debt maturity. Companies with medium ratings have longer debt maturity structure. Liquidity shows a negative association with longer debt maturity structure. It is evident that at high rating scale with high liquidity, and at lower rating scales with lower liquidity firms have a shorter debt maturity. Mid rated firms with a low probability of refinancing risk show longer debt maturity structure. Considering refinancing risk by Asian companies make the nonlinear relationship between credit ratings and debt maturity choices. Results suggest the importance of credit ratings for the optimization of debt maturity structure of Asian firms, which was totally overlooked by the past studies. The findings of this study are consistent with the liquidity hypothesis. The findings also motivating financial managers and investors to consider credit ratings as a measure of financial constraints.

Highlights

There are several studies in the finance discipline that are mostly concentrated on the choice between debt and equity in the Asian markets, but there is another area of interest that is debt maturity structure, which can be of the same importance but is generally not a focus of financial research
The result indicates that mainly companies wanted longer maturity in their debt maturity structure, which could be due to avoiding liquidity risk and underdeveloped bond market in Asia
Control variables show some differences in the debt maturity structure of the Asian firms

Summary

Introduction

There are several studies in the finance discipline that are mostly concentrated on the choice between debt and equity in the Asian markets, but there is another area of interest that is debt maturity structure, which can be of the same importance but is generally not a focus of financial research. The theoretical literature has acknowledged the refinancing risk arising from the short-term debt, (Dang and Phan 2016; Parise 2017). The contemporary theoretical literature argues that refinancing or liquidity risk may itself be an additional source of credit risk because short-term debt increases the possibility of a run on the firm and worsen the conflict of interest between debt holders and shareholders, (Dimitrov et al 2015; He et al 2017; Wang and Zhang 2017)

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