THE IMPACT OF INTERNATIONAL AND NATIONAL CREDIT RATING LEVEL IN CAPITAL STRUCTURE OPTIMIZATION: AN EVIDENCE FROM INDONESIA NON-FINANCIAL LISTED FIRMS

• Main Author: Christina
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/57658
• Institution: Institut Teknologi Bandung

Credit rating is a measure of a firm’s creditworthiness in financial markets. Given the cost and benefit from credit rating, the credit rating is supposed to affect the capital structure decision of the following year. Many prior researches have sought to see the relationship between credit rating and capital structure in many countries and have complex results with several contradictions. Despite the growing research that took into account the credit rating as one of the capital structure determinants, there is almost no research that examines the extent relationship which captures the effect of credit rating to the distance to optimal capital structure level. Therefore, this research aims to examine the effect of each rating level on the firm’s capital structure which would suggest that the cost and benefits of credit ratings are substantial for firms, and to examine whether the credit rating levels are substantial for the firms to minimize the distance to the optimal capital structure or not. Moreover, since there is also few research that examine the effects from different credit rating agencies, this research will also examine each credit rating from different agencies and compare the results. This research uses secondary data that will be collected through Thomson Reuters EIKON database. Non- financial Indonesia listed firms that are rated by PEFINDO, Standard & Poor’s, Moody’s, or Fitch are selected from the first quarter of 2011 to the first quarter of 2021. However, due to the lag one year of capital structure decision, data for credit ratings are needed since the first quarter of 2010. Different capital structure’s proxies as the dependent variables are used to support the robustness of the model, namely long-term debt to total capital (LTDTC), long-term debt to total asset (LTDA), and long-term debt to total equity (LTDTE). The optimal level of capital structure uses the Industry Median Leverage Ratio (IMLR). Unbalanced panel data analysis with fixed effect (FE) technique is employed to test the effect of each credit rating level on capital structure decisions. The result shows that international credit rating is important as the determinant of capital structure level optimization. There is a significant non-linear U-shape between Standard & Poor’s, and Fitch credit rating level to the capital structure level and to the distance to optimal capital structure level. Low rated and high rated firms tend to issue higher long-term debt in the following year and also have a bigger distance to optimal level. Thus, it appears that top rated firms are utilizing the low cost of debt to increase their debt following the trade-off theory, but the action seems to be spontaneous since they are not utilizing it to get their debt level to the optimal level. Besides, mid rated firms tend to maintain their debt to low level and having a smaller distance to optimal level. However, using Moody’s credit rating, the result shows a significant non-linear inverted U-shape which is the opposite from the previous result. On the other hand, the national credit rating of PEFINDO’s is not giving any significant impact at all. All results are robust with excluding the sample with few observations and state-owned firms.