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Read the attached document and write a Literature Review of: Do Firms target Credit Ratings or Leverage Levels?
Literature Review: Do Firms Target Credit Ratings Or Leverage Levels?
Length: 4 pages (1449 Words)
Various studies have been done on the impact of credit ratings and its relation to capital leverage leading to different conclusions. Typically, a study by Denninger in 2011 asserted that nearly all firms with a public debt currently have at least one external rating. Further, the study observed that some firms target an explicit rating while others are keen to maintain a specific threshold rating. In this regard, for a certain rating to be achieved or maintained, firms alter their capital structure by the issue of equity or by buying back debts. As George in his book on corporate finance in 2011 stated, this might have been considered as changing their leverage levels. Some other firms try to strengthen their balance sheets by selling their assets or cutting their dividends. As it surfaces, many firms attempt to trade off the benefits of financing debts with having a better credit rating. This study implies that firms not only target the two factors, credit rating, and leverage levels but also try to balance the two. Moreover, it implies that there is a tradeoff between the two so that the two are in a degree mutually exclusive so that a firm can't have both increasing at the same rate.