Article | Open Access | Published: 3 December 2012
Effect of Credit Rating on Capital Structure: A Study on Non-Financial Firms in Pakistan
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Abstract:
This study aimed to investigate whether the credit rating is an important determinant other than the firm characteristic to obtain optimally capital structure focusing on the research hypothesis that the firms with higher credit along with the other factors (FTOA, ROA, and Size) tend to have more debt in their capital structure of firms rated by PACRA and Karachi Stock Exchange (KSE). For this research, a sample size of 48 observations (3 years data of 16 firms) was taken based on convenience sampling. Results obtained by using the Ordinary Least Square Model (OLS) as a statistical tool to test the hypothesis Findings- Analysis suggested that credit ratings do have an impact on a firm's capital structure. It was concluded that firms with higher credit ratings along with other factors (FTOA, ROA, and Size) do not tend to have more debt in their capital structure. Outcomes of this research might help investors, debtors and other stakeholders of the firms (rated by PACRA) to understand the impact of credit rating on firm's debt ratio and the overall dynamics and mechanism of capital structure.
Keywords:
:FTOA(Fixed Asset to Total Asset ratio), ROA(Return On Asset), PACRA(Pakistan Credit Rating Agency), Karachi Stock Exchange, OLS(Ordinary Least Square)
Publisher:
ILMA UNIVERSITY
Published:
3 December 2012
Issue:
Issue 2 : Volume 8
E-ISSN:
2409-6520
P-ISSN:
2414-8393
This is an open access article distributed under the terms of the Creative Commons Attribution CC BY 4.0 license, which permits any use, distribution, and reproduction of the work without further permission provided the original author(s) and source are credited.