The Interaction between Working Capital and Corporate Credit Ratings

Abstract

Cash flow adequacy is one of the critical factors influencing corporate credit decisions. Since working capital deals with short-term cash flows, we explore the interaction between working capital and corporate credit ratings. By employing working capital and firm’s characteristics as explanatory variables, we examine the determinants of corporate credit ratings. Following a rigorous data selection methodology and hypothesis testing, corporate credit ratings of Australian firms are collected from Standard & Poor’s for the period 2003-2008. By employing panel least squares (cross-section fixed effects) and ordered logit models, we provide evidence on the determinants of corporate credit ratings. Empirical evidence suggests that working capital influence corporate credit ratings and we report cash, inventory and size as statistically significant determinants of corporate credit ratings.