Investigating the effect of credit ratings on the pecking order theory of the capital structure : empirical evidence from the UK market

Abstract EN

The aim of this paper is to empirically investigate one of the most influential theories of capital structure; the pecking order theory in the UK market during the period 1999-2005.

Furthermore, the paper examines the effect of credit ratings on capital structure decision making.

The study employs and extends the approaches used by Shyam-Sunder and Myers (1999) and Frank and Goyal (2003) to investigate the pecking order theory.

The results of this paper support the pecking order theory, that is in line with Shyam-Sunder and Myers (1999).

Moreover, the results indicate that credit-rated firms are more likely to finance their deficits using equity rather than debt, due to the fact that credit rated firms target credit ratings and take into consideration the disadvantageous effects that the issuing of new debt is likely to have on their credit ratings.