||This paper aims to realize that the capital structure decisions will be affected by the credit rating of a firm. According to the argument made by Kisgen(2006), a firm will incur discrete costs and benefits as a result of the level changes of its credit rating situation, and then causes jumps on firm‘s value. In order to maximize firm value, firms near a credit rating downgrade or upgrade will issue less debt relative to equity (as a portion of assets) than firms not near the change in credit raring, attempting to gain the advantage of an upgrade and avoid the disadvantage of a downgrade.|
The firms near a rating change are defined in different ways, and four hypotheses are tested empirically, using pooled OLS, fixed effect model and random effect model, to know how the concerns of firms‘ credit rating changes directly affect its financing decisions on debt and equity structure. Plus or Minus test(POM test), High or Low test(HOL test), Investment Grade or Speculation Grade test(IG/SG test) and Watch list test(Wlist test) are used to examine the influences of credit rating on firms‘ financing decisions. The firm which has a credit rating at the beginning of the year in all industries in Taiwan is included in our sample, and the sample period is from 2000 to 2007.
As a result, although control variables such as leverage, profitability and firm size have significant impacts on financing decision, we observe that the impacts of credit ratings on net debt issuance are negative but not statistically significant in all models except in HOL test, in which credit rating variables are negative and significant at 5% confidence level. For this reason, the effect of credit ratings on firms‘ financing decision can not be concluded and should be examined further.