English, Article edition: OPTIMAL CREDIT RATINGS SEBASTIAN HERZOG; CHRISTIAN KOZIOL; TIM THABE

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Bookmark: http://trove.nla.gov.au/version/82931
Physical Description
  • article
Language
  • English

Edition details

Title
  • OPTIMAL CREDIT RATINGS
Author
  • SEBASTIAN HERZOG
  • CHRISTIAN KOZIOL
  • TIM THABE
Physical Description
  • article
Notes
  • In this paper, we show that an individual optimal credit rating exists for firms and empirically test whether firms strive to achieve their optimal rating. For this purpose, we consider the structural model by Leland [12], which balances the benefits of debt in the form of the tax-deductibility of interest payments against bankruptcy costs in order to obtain the optimal rating. Testable implications for both firms which have implemented their optimal rating and firms with non-optimal ratings are deduced. An empirical test with 420 firms contained in the S&​P 500 Index indicates that all factors which theoretically drive optimal ratings also affect the observed rating in the predicted way. In line with our theory, observed ratings can be considerably better explained if, in addition to the traditional factors such as leverage and firm size, a proxy for bankruptcy costs and the default probability related to the optimal rating is considered. These findings suggest that U.S. firms contained in the S&​P 500 Index strive to achieve their optimal credit ratings.
  • Optimal versus non-optimal credit ratings, structural model, empirical test of optimal credit ratings, rating prognosis
  • RePEc:wsi:ijtafx:v:11:y:2008:i:02:p:225-247
Language
  • English
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