Three Essays on Capital Structure, Credit Rating, and Sources of Capital

Date
2022
Authors
Alkharashi, Omar
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Abstract

This dissertation consists of three essays that explore the impact of access to trade credit on capital structure, the influence of access to internal capital markets on corporate credit ratings, and the variations in the choice of leverage based on access to sources of capital. The first essay sheds light on the relative importance of access to trade credit in a firm's leverage choice. Group affiliation is employed as a proxy measure for firm's access to trade credit, with group affiliated firm displaying higher levels of total liability to assets (TLA) and lower levels of total debt to assets (TDA) relative to non-group affiliated firms. Group firms rely more extensively on trade credit and utilize trade credit as a substitute for debt. To identify causal relationships and verify the proxy measure, this study exploits a securitization reform in India that strengthened creditor rights as an exogenous shock. The overall findings suggest that a firm's ability to access trade credit substantially influences its capital structure decisions. The second essay examines the role of business group affiliation in corporate credit ratings. Empirical analysis reveals that group-affiliated issuers are assigned higher rating grades relative to non-group affiliated issuers, suggesting that rating agencies include group affiliation in determining firms' creditworthiness. This study then employs default data to investigate whether the higher rating for group affiliated firms is warranted. Controlling for rating, group firms tend to have higher default rates, which indicates that rating agencies may overstate the effect of group affiliation leading to inflated ratings being assigned to group issuers. The third essay studies variations in the choice of capital structure based on access to sources of capital using a large firm-level data set of public and private firms in India. The sources of capital potentially include the public equity market, bank and public loans, and trade credit from suppliers and other related firms. After controlling for firm characteristics, this study shows that listed firms with access to public equity markets generally employ lower levels of leverage. Additionally, this paper finds that firms that have access to the debt market (firms with published debt ratings) exhibit higher degrees of leverage. The overall findings suggest that leverage is not only a function of firm characteristics (firm's demand factors), but it is also substantially influenced by supply factors including the firm's ability to access various sources of capital.

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Keywords
Capital structure, Credit rating, Capital sources
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Department
Finance