Can Credit Ratings Determine Firm’s Capital Structure?
Topic: Can Credit Ratings Determine Firm’s Capital Structure?
This paper will study the relationship between Credit Ratings and Firm’s Capital Structure by analyzing the given data for the past 10 years. It will study the effect of credit ratings on capital structure. Does the decision of a firm financing a project by debt or equity will change because of the firm’s credit ratings or not?
The report should include the below sections:
- Empirical Tests
- Data and summary statistics
The data include :Standard & Poor’s Credit Ratings at the beginning of a particular year and the debt to total capitalization ratios (Debt to Equity Ratio) to observe the changes in the capital structure.
Under this section please use the data given for NYSE (New York Stock Exchange) companiesabout 2,000 firms for the period 2008 till 2017. First do two tables, Table 1 should have each ratings and the total firm -years Mean, Median, Standard diviation, % downgraded, % upgraded. Table 2 should shows Debt and equity changes. By using the data given and write about them. Second, create one Figure shows the Capital Structure behavior and the Credit Ratings changes and explain it.
Example table 1:
Example table 2:
- Main tests:
Do a regression analysis to the data using the below methodology:
test the following hypothesis, to determine whether there is an empirical evidence that supports the formulated hypothesis or not.
- Ho: Credit ratings do not determine a firm’s capital structure
- H1: Credit ratings determines a firm’s capital structure
This research involves two main variables which include credit ratings (CRs), and the capital structure (CS). Where the independent variable is credit rating forms which illustrate firm’s creditworthiness or credit risk to predict the probability of default, and the dependent variable is capital structure forms which shows the combination of debt or equity used to finance the overall operations and growth of a firm.
First, write the linear regressions needed to do the tests (It should be about 5 equations). Second, write about them and explain what each abbreviation mean.
Example about the abbreviations explaination:
Examples of equations:
- Main Results:
Test the regression on the data and do 6 Tables (similar to the provided tables but not the same please do some changes on them).
Second, explain each table and report the results
Third, do two figures that shows the analysis.
Example of the tests results (6 Tables):