The Impact of Credit Rating Changes on Capital Structure Decisions: Evidence from Non-Listed Firms in Germany

Abstract

Changes in corporate credit ratings affect subsequent capital structure decisions. The results for listed companies in our U.S. sample support Kisgen’s (2006, 2009) credit rating-capital structure hypothesis. However, applying a system GMM system approach, the implications of this hypothesis are weakened by our estimates for the speed of capital structure adjustment after credit rating changes. In contrast, publicly listed companies in our German sample are widely independent from changes in their creditworthiness. Similarly, changes in the capital structure and financing choices of high creditworthy privately-held firms in Germany are more or less independent from credit rating changes. At speculative grade rating levels, however, these firms implement financing activities that strengthen their capital structure subsequent to a rating downgrade. Our findings for the speed of adjustment support these results. We find some contradictory patterns for credit rating upgrades at lower rating levels. We conclude that the close relationship of German firms, whether publicly listed or not, to their banks helps them to mitigate else substantial effects of adverse changes in their creditworthiness.