Impact of credit rating on capital structure and earning management behavior
Author: Shoaib Ali

Credit ratings have become a widely accepted measure of firms’ creditworthiness in financial markets. Despite the significant growth of rating agencies, with a continuous reliance on credit ratings by regulators, investors and firms, prior academic literature generally tends to underestimate the relevance of credit ratings in firms’ financial decision-making. This thesis, therefore, provides a comprehensive analysis, which aims to examine the impact of external credit ratings on the financial structure decision-making of Pakistani firms. The thesis has three empirical chapters. The first empirical chapter examines whether there are any systematic differences in firms’ levels of leverage across the rating levels which would suggest that the cost and benefits of credit ratings are material for such firms. The study finds that credit ratings are an important determinant of the capital structures of firms and that there is a strong nonlinear inverted U-shaped relationship between credit ratings and capital structures. It is noted that rated firms have higher leverage than non-rated firms, but within the rated firms, leverage varies across the rating levels. High and low rated firms are found to have low leverage in their capital structures, and mid rated firms have higher leverage. Low gearing ratios may suggest that such firms have higher incentive to maintain their current ratings or to achieve upgrades, given the cost and benefits offered by credit ratings, than firms with high gearing ratios. While credit rating play a significant role in explaining why firm involve in managing their earning and it is found that rated firm manage their earning in a significantly different way as compared to the non-rated firms and it is also found that firm at the end of the rating spectrum manage their earning to the greater extent as compared to the mid rated firm Supervisor:- Dr. Attiya Javid

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Keywords : Capital Structure, Credit Rating, Earning Management, Management Behavior
Supervisor: Attiya Yasmin Javid

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