Abstract
The ideal capital structure of a firm that maximises shareholders’ wealth has been at the centre of extensive academic debate in managerial finance. In most parts of the world, determining how good a company's credit quality is, through the use of credit ratings, has become very important in deciding an ideal mixture of equity and debt compositions in a company’s funding structure. Since there is not much research, in general, on how credit ratings affect the composition of a company's capital, this study focuses on African markets, where not much research has been done so far. Therefore, this study sought to determine how credit ratings have affected the capital structures of the top 40 companies on the Johannesburg Stock Exchange (JSE) from 2011 to 2020. Essentially, a panel data regression analysis is utilised in determining the impact of credit ratings on capital structure.
After controlling for critical company-level criteria in defining capital structures, the study demonstrates that real and potential rating changes have a considerable impact on the capital structures of rated companies. Concerns about discrete costs (benefits) related to changes in credit ratings were observed in the study, prompting companies in the sample to adapt their capital structures accordingly. Liquidity, profitability, tangibility, and growth opportunity all have significant negative relationship with the capital structures of the JSE top 40 companies. The latency of the dependent variable is also significant in the study, but has a positive effect on capital structures. It was revealed that capital structures are unaffected by size and industrial dummies
The findings of this study have proven that credit rating changes have an effect on capital structure in line with the CR-CS hypothesis, but they are incompatible with trade-off and pecking order theories. Accordingly, credit ratings will continue to play a crucial role in capital structure decisions. Key words : Total debt to total assets, capital structure, credit ratings, investment grade, rating outlook, speculative grade.