Abstract
Credit rating is a measure of a firm's creditworthiness in financial markets. The cost and benefit given from credit rating is supposed to affect the capital structure decision in the following year. This research examines the effect of each rating level on the capital structure level and examines how credit ratings are substantial for the firms to reach the optimal capital structure. It will also compare the impact of credit ratings from different agencies. Quarterly data of 110 firms that fulfil the requirements are gathered from 2010 until 2021. Panel data analysis using the fixed effects method shows a nonlinear U-shape between Standard & Poor's and Fitch's credit rating on capital structure level and on the distance to optimal capital structure level. Low and high rated firms tend to have higher debt levels in the following year and have a larger distance to the optimal capital structure level. Meanwhile, mid rated firms have lower debt levels and smaller distances. However, the result is opposite using Moody's rating and insignificant using PEFINDO's rating. This research suggests that credit rating is important to the capital structure decisions and other Indonesia firms could acquire credit rating especially from international rating agency.
Highlights
As of today, there are still an ongoing debate in academic literature about which and how determinants influence the capital structure decision
Low credit rating shows a bad image since it represents high credit risk or low ability of the firm to fulfil its financial obligations within the due dates
With the panel data regression using fixed effect model, this research shows that firms with international credit rating of Standard & Poor’s and Fitch agency have a non-linear U-shape relationship to the capital structure level and to the distance to optimal capital structure in the following year
Summary
There are still an ongoing debate in academic literature about which and how determinants influence the capital structure decision. This research saw the impact of credit rating level on capital structure level, and examine whether the capital structure decision made following the credit rating. The Impact of International and National Credit Rating Level on Capital Structure Optimization: Evidence from Indonesia Non-Financial Listed Firms level is endeavoured to maintain or lessen the distance between actual and optimal capital structure. Knowing how each top 3 international rating agency and national agency impacts the capital structure decision of firms will give more broad results about the credit rating significance. This research will determine how each rating agency gives impact in the Indonesia firm’s capital structure decision. This research would like to validate and evaluate the effect of both national and international credit rating on the capital structure decision of Indonesia non-financial listed firms. 110 firm’s quarterly data are gathered from 2010 until the first quarter of 2021 since prior to the year of 2010, there is much data that is unavailable
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