THE IMPACT OF CREDIT RATINGS ON CAPITAL STRUCTURE (THE CASE OF LISTED COMPANIES ON HOSE) In Partial Fulfillment of the Requirements of the Degree of MASTER OF BUSINESS ADMINISTRATION In Finance By Ms: Nguyen Thi Tuong Van ID: MBA06044 Advisor: Dr. Nguyen Kim Thu International University - Vietnam National University HCMC August 2014 i THE IMPACT OF CREDIT RATINGS ON CAPITAL STRUCTURE In Partial Fulfillment of the Requirements of the Degree of MASTER OF BUSINESS ADMINISTRATION In Finance By Ms: Nguyen Thi Tuong Van ID: MBA06044 International University - Vietnam National University HCMC August 2014 Under the guidance and approval of the committee, and approved by all its members, this thesis has been accepted in partial fulfillment of the requirements for the degree. Approved: ---------------------------------------------Chairperson ---------------------------------------------Committee member ---------------------------------------------Committee member ---------------------------------------Committee member ---------------------------------------Committee member ---------------------------------------Committee member ii Acknowledge To complete this thesis, I have been benefited from the following people: First of all, I would like to express my sincere gratitude to my advisor, Dr. Nguyen Kim Thu, who inspired and recommended me the research idea and always instructed me dedicatedly and enthusiastically during the time I conducted this thesis. Whenever I meet difficulty, she always gives me the solutions, provide me the necessary documents and raise up my knowledge to continue doing my thesis. Secondly, I want to show my gratefulness to the professors and lecturers for giving us their valuable knowledge during the study period. This is the foundation for this thesis completion. Next, a sincere thank you is sent my family who always stand beside me. Thanks for their continuously encouraging and supporting me to follow and complete the MBA program of International University. I cannot finish my thesis on time without their contribution. Last but not least, I want to thank all my friends in MBA06 and MBA07, especially Ms. Tran Hong Quynh, Ms. Do Thi Hoang Anh, Mr. Nguyen Thanh Tuan, Mr. Tran Le Duy, Ms. Le Tran Nguyen Nhung, Mr Nguyen Quy Vu for your share and encouragement. Ho Chi Minh City, August 2014, Nguyen Thi Tuong Van iii Plagiarism Statements I would like to declare that, apart from the acknowledged references, this thesis either does not use language, ideas, or other original material from anyone; or has not been previously submitted to any other educational and research programs or institutions. I fully understand that any writings in this thesis contradicted to the above statement will automatically lead to the rejection from the MBA program at the International University – Vietnam National University Hochiminh City. iv Copyright Statement This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author‘s prior consent. © Nguyen Thi Tuong Van/ MBA 06044/ 2014 v Table of Contents CHAPTER I: INTRODUCTION .....................................................................................1 1.1. Background and research problems .................................................................1 1.2. Research Questions .............................................................................................2 1.3. Contributions of the research ............................................................................3 1.4. Research Methodology .......................................................................................3 1.5. Scope and Limitation ..........................................................................................4 1.6. Structure of Research .........................................................................................4 CHAPTER 2: LITERATURE REVIEW ........................................................................5 2.1. Credit ratings .....................................................................................................5 2.1.1. Introduction of credit ratings .......................................................5 2.1.2. Credit ratings agencies ..................................................................7 2.1.2.1.Foreign market ...................................................................7 2.1.2.2.Vietnam market .................................................................9 2.2. Capital structure ...........................................................................................11 2.2.1. Theories of capital structure .......................................................11 2.2.1.1.The Irrelevance Theory of Capital Structure ...............11 2.2.1.2.The Taxes theory of Capital Structure ..........................12 2.2.1.3.The Trade-off Theory ......................................................13 2.2.1.4.Pecking Order Theory .....................................................15 2.2.1.5.Agency Cost Theory .........................................................16 2.2.2. Previous empirical studies of determinant of capital structure17 2.2.2.1. Size....................................................................................17 2.2.2.2.Growth Opportunities .....................................................18 2.2.2.3.Tangibility.........................................................................19 2.2.2.4.Profitability .......................................................................19 2.2.2.5. Industry level factor........................................................20 2.3. The impact of credit ratings on capital structure ......................................23 2.3.1. Foreign researches .......................................................................23 2.3.1.1. Kisgen Darren J. (2003, 2006, 2009) ...............................23 vi 2.3.1.2. Berlekom, Bojmar and Linnard (2012)and Kemper and Rao (2013) .........................................................................25 2.3.1.3. Agha (2011) ......................................................................25 2.3.1.4. Helene and Hårstad (2012) ..............................................26 2.3.1.5. Drobetz and Heller (2014) ................................................29 2.3.1.6. Naeem, Shammyla (2012) .................................................30 2.3.2. Vietnam researches .......................................................................33 CHAPTER 3: COLLECTION AND RESEARCH METHODOLOGY .....................40 3.1. Data collection ...............................................................................................40 3.2. Reason for selecting CRVC credit ratings ...................................................40 3.3. Choosing Variable and Description ..............................................................41 3.3.1. Dependent variable ...........................................................................41 3.3.2. Credit ratings ....................................................................................43 3.3.2. Control variable ................................................................................43 3.4. Methodology ..................................................................................................47 3.4.1. Model 1: The Impact of Credit rating score on Capital Structure47 3.4.2.Model 2: The impact of Credit Rating changes on Capital Structure ...........................................................................................................................48 3.4.3. Rung regression model ......................................................................49 CHAPTER 4:DATA ANALYSIS ...................................................................................52 4.1Descriptive Analysis .......................................................................................52 4.2. Result analysis ...............................................................................................53 4.2.1. Correlation Matrix.............................................................................53 4.2.2. Test for Heteroskedasticity ...............................................................54 4.2.3. Panel regression model analysis .......................................................54 4.2.4. Empirical Results ...............................................................................56 CHAPTER 5: CONCLUSION........................................................................................59 5.1. Main finding of the thesis .............................................................................59 5.2. Limitations of The Thesis .............................................................................60 5.3. Recommendations .........................................................................................60 vii 5.4. Suggestion for future research .................................................................................61 REFERENCE ...................................................................................................................62 APPENDICES ..................................................................................................................70 viii List of Abbreviation ACRC Absolute credit rating changes CIC Credit Information Center CR Credit rating CRAs Credit rating agencies CRVC Credit Ratings Vietnamnet Center FEM Fix Effect Model HNX Hanoi stock exchange HOSE Hochiminh stock exchange M&M Modigliani and Miller REM Random Effect Model S&P Standard & Poor's Vietnam Credit Vietnam Credit Information and Rating Company WACC Weighted Average Cost Of Capital ix List of Tables Table 1: The Credit Ratings description ..............................................................................6 Table 2: Credit Rating Definition by the Big Three CRAs .................................................9 Table 3: Classification criteria1 .........................................................................................11 Table 4: M&M (1963): A correction of irrelevance model of capital structure ................12 Table 5: Summary of previous empirical studies ..............................................................20 Table 6: Summary of previous empirical studies .............................................................34 Table 7: Credit ratings transform .......................................................................................43 Table 8: Industry level factor for each industry .................................................................46 Table 9: Fixed Versus Random Effect ...............................................................................50 Table 10: Model 1 summary statistics ...............................................................................52 Table 11: Model 2 summary statistics ...............................................................................52 Table 12: Correlation Matrix .............................................................................................53 Table 13: The result of test for Heteroskedasticity ............................................................54 Table 14: Analysis result of Pool OLS. FEM, REM .........................................................54 Table 15: The result of F-test .............................................................................................55 Table 16: The result of Hausman test ................................................................................56 x List of Figures Figures 1: : Market share of credit ratings agencies ........................................................ 8 Figures 2: Trade-off theory‘s Capital structure (The Optimal Capital Structure, the Value of the Firm and the Cost of Capital) ...............................................................................14 xi Abstract This research aims to examine the impact of credit ratings influencing the capital structure of listed enterprises on Hochiminh Stock Exchange. The research data were collected from 239 listed enterprises over the period of 4 years in the period between 2009 and 2012 to use for Panel data method. The research would conduct test assumptions to define the optimal regression model among Pooled OLS, Fixed Effects Models and Random Effect Model. The thesis has two empirical models : - The first empirical model investigates whether the firm which has a higher credit rating, have lower financial leverage than those with lower credit ratings. The study finds that credit ratings are an important determinant of the capital structures of firms and that there is a strong relationship between credit ratings and capital structures. - The second empirical model examines the influence of the change of credit ratings between each year on the short term debt to equity of listed firms on Hochiminh stock exchange. Consistent with the predictions, the results indicate that firms‘ change of credit rating significantly influenced on the following year‘s short term debt of the firm. Keywords: credit ratings, capital structure xii xiii CHAPTER 1: INTRODUCTION This section provides the content of the study, section 1.1 discusses research’s background and research problems. Based on that, section 1.2, 1.3 and section 1.4 present the research questions, contribution of the research and research methodology are specified. Next, the scope and significance are as well listed out in section 1.4. Finally, section 1.5 provides the organization of the thesis 1.1 Background and research problems Credit ratings is a terminology that has become a widely accepted measure of firms‘ creditworthiness in financial markets. They like a tool that has established credit standards in the market, which have received regulatory attention in several countries as well (Pinto, 2006). For corporations that need to raise funds in the financial market, credit ratings have important implications, since lower ratings lead to higher funding costs, and vice versa (Boot and Milbourn, 2002). Moreover, credit ratings are also an important part of investment decisions of institutional investors. Cantor & Packer (2007) state that 86% of fund managers explicitly use ratings in their investment guidelines. Similarly, the research of Graham and Harvey (2001) demonstrates that the credit rating is one of the most important factors affecting capital structure decisions. Kisgen & Strahan (2010) argued that the credit ratings matter because it serves as a signal of firm quality for investors and therefore affects the company‘s capital structure. Despite a continuous reliance on rating agencies by regulators, investors and firms along with the significant growth of rating agencies globally, academic studies generally tend to underestimate the relevance of credit ratings for firms‘ financial structure decisionmaking. After the recent financial crisis of 2008, it becomes imperative to investigate the role and significance of their output for the firms‘ financing decisions to assess the importance of credit rating agencies in the financial markets. (Naeem, Shammyla, 2012). A recent study by Bacon, Grout & O‘donovan. (2009) of 43 senior treasury professionals from nonfinancial UK firms, indicates that ratings have become more important during the recent crisis, while the firms without ratings sought to obtain them during this period. This suggests that the credit ratings could possibly be an important supply-side factor and 1 necessitates further exploration of how this factor can be influential in determining the financial structure of firms. The number of previous studies exploring the relationship between credit ratings and capital structure are limited. Kisgen is said to be a pioneer in the study of this relationship. Kisgen et al. (2006, 2009, 2010) Michelsen and Klein (2011), Kemper and Rao (2013) used credit ratings – capital structure model to test the relevance of credit ratings with capital structure in the US market. However, the result of Kemper and Rao (2013)‘s study contrast to two previous studies. Sundheim and Hårstad (2012) used multiple regression models to test the effect of credit ratings, among other factors , on capital structure in the Norwegian market. The study had the same result with Kisgen (2006), Michelsen and Klein (2011). To our knowledge, there has been a research on the effect of credit rating changes in stock returns and capital structure of listed companies in Vietnam by Ms. Pham Quynh Chau (2011). Her data base on Credit Information Center and the model‘s variable are different from this research and she choose long-term debt/total assets as her model‘s proxy. Moreover, she did not examine the impact of credit ratings on capital structure. Base for some reasons above, this opens a new direction for determining the impact of credit ratings on capital structure. 1.2 Research questions Research questions As stated earlier, this research aims at examining the relationship between credit ratings and capital structure for listed firms on HOSE. In particular, the research examines if the firms that have high credit ratings will have lower financial leverage than those with low credit ratings. In addition, the thesis will verify if firm has a positive change of credit rating will borrow less than others. Based on the research objectives, the following two questions will be answered in the research: --Do firms with higher credit ratings have lower financial leverage than those with lower credit ratings ? The firm have a high credit ratings that providing them with a higher incentive to maintain their credit ratings than other rated firms in the market. Therefore, high rated 2 firms are expected to have a high concern for benefits enjoyed by their credit ratings and thus have low levels of gearing. - Is there a negative relationship between the range of credit ratings changes of the firm and the following short term debt to equity ratio? The implications of the credit rating – capital structure hypothesis are tested by examining whether firms follow a pattern of leverage change behavior after they have been changed in credit ratings. 1.3 Contributions of the research Capital structure remains one of the most well researched topics in finance literature, where several key aspects of the subject have already been explored. Currently, in Vietnamese market, there have been a number of researches on capital structure and the determinants of capital structure. However, there is little research on credit ratings in general as well as on the relationship between credit rating and capital structure. Kisgen (2006) stated that ―future capital structure research would benefit from including credit ratings as part of the capital structure framework, both to ensure correct inferences in capital structure empirical tests, and more generally, to obtain a more comprehensive depiction of capital structure behavior‖ (p.1069). This thesis offers, an in depth analysis of the relevance of credit ratings to the financial structure of HOSE firms, and thus makes a number of contributions to finance literature. The findings of this study suggests that credit ratings are important for firms in getting access to the Vietnamese debt markets. For the rated firms specifically, credit ratings are one of the important factors in determining the level of leverage. 1.4. Research methodology This research uses quantitative research methods to examine the relationship between credit ratings and capital structure. Literature review with relating theories and empirical researches provide orientation for the study and determine factors to investigate in the regression model. Quantitative methods with the support of analyzing tools including Eviews, Stata and Excel are applied for the regressions, and statistical tests. Data sources 3 of this thesis are from financial statements of listed firms on Hochiminh Stock Exchange and credit rating results of Credit Ratings Vietnamnet Center (CRVC) 1.5 Scope and limitation This study focuses on testing the relationship between credit ratings and capital structure of companies listed on HOSE within 4 years, from 2009 to 2012. Therefore, this study has just conducted research on listed companies in HOSE, so the results cannot be applied to all unlisted companies and companies listed on HNX. 1.6 Structure of research Besides the Introduction, the thesis has four more chapter:. - Chapter 2 provides details of the general background of the rating agencies in the world and Vietnam credit rating agencies, their operations and their significance. This chapter also reviews the important theories of capital structure and presents the relevant empirical evidence about the relationship between credit rating and capital structure. - Chapter 3 discusses the methodology adopted in the present study. Specifically, it presents the data collection procedures, models and the variables for the two empirical chapters of the thesis. - Chapter 4 investigates the relationship between the level of credit ratings and the leverage structure of listed firm on HOSE. Specifically, it presents the descriptive statistics of the sample used in the analysis and the empirical results. The section applies quantitative method with the support of analyzing tools including Excel 2007, Eviews 8.0 and Sata 12.0. - Finally, Chapter 5 concludes the thesis by summarizing the key findings, discussing the limitations of the study and offers recommendations for future research. 4 CHAPTER 2: LITERATURE REVIEW 2.1.Credit ratings 2.1.1. Introduction of credit ratings According to Naeem, Shammyla (2012), credit rating is an economic term, which estimates the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating helps in the assessment of the solvency of the particular entity that seeks to borrow money such as an individual, corporation, state or provincial authority, or sovereign government. Regulatory bodies and rating agencies define themselves in their own ways. These ratings based on detailed analysis of various credit rating agencies (CRAs). CRAs does not rely on mathematical formulas to evaluate credit rating, instead, they use their judgment and experience in determining what public and private information should be considered in giving a rating. In other words, credit rating analysis of a corporate issuer typically considers many financial and non-financial factors, both qualitative and quantitative. Credit ratings evaluation base on economic, regulatory, and geopolitical influences; management and corporate governance attributes; key performance indicators; competitive trends; productmix considerations; R&D prospects; patents rights; and labor relations (Meinna G – 2013). Credit ratings are a set of alphabetic codes assigned in descending order according to the rising likelihood of default. They may also include numerical codes or symbols, depending on the rating agencies, to show the relative standing within each set of broad category of alphabetic codes (Naeem, Shammyla,2012). For example, Standard and Poor‘s assigns alphabetic codes such as AAA, AA, A, BBB, BB and so on, with ‗+‘ or ‗-‘ modifiers (AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB- and so on) to show the respective creditworthiness within the broad rating category, whereas Moody‘s assign numerical modifiers (Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3 and so on) to the alphabetic codes (Aaa, Aa, A, Baa and so on). Nguyen Duc Huong (2012) claim that credit ratings represent riskiness of the companies and bonds, thus they have been extensively used by bond investors, debt issuers, and government officials. Lower credit ratings result in higher borrowing costs because the borrower face a higher risk of default. Similarly, Yoko Ogimoto (2008) asserted that 5 corporate credit ratings play a critical role in the provision of information to evaluate and decide the credit problems, when enterprises want to have a frequent need for loans and want to set up a long-term relationships with banks or investors. Thus building a corporate credit rating system is not only helpful for the banks and investors in evaluating the possibility of loan recovery, but also helpful for enterprises in evaluating its position compared with other businesses. Despite the importance of credit ratings Vietnam has not promulgated in any legal documents regarding corporate credit rating. Moody’s S&P Fitch Rating description Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB- Ba1 BB+ BB+ Non-investment grade Ba2 BB BB speculative Ba3 BB- BB- B1 B+ B+ B2 B B B3 B- B- Caa1 CCC+ Caa2 CCC Caa3 CCC- Prime High grade Upper medium grade Investment grade Lower medium grade Highly speculative Speculative grade, High yield Substantial risks CCC Extremely speculative Default imminent with little 6 CC prospect for recovery Ca C C D DDD In default Table 1: The Credit Ratings description Source: Boehm Kristina (2013) 2.1.2. Credit ratings agencies. Sylla (2002) presented that credit rating agencies originated in the US market, in the early 20th century, due to the expansion of financial activities in the US and globally, apart from investors, financial regulators were also demanding wider disclosure in terms of firms‘ financial standings. Moody‘s, recognizing the need, formed the first formal rating agency in 1909 (Sinclair, 2005). Following Moody‘s, Standard Statistics Company and Fitch Publishing Company also emerged in this period. Since their inception, credit rating agencies gradually became an important intermediary specializing in the provision of reliable appraisals of the creditworthiness of the firms and countries. Due to the desired attributes and general acceptability of credit rating agencies within the financial markets, they soon gained recognition from regulatory bodies (Naeem, 2012). According to Jacob de Haan and Fabian Tenbrink (2011) CRAs essentially provide two services. First, they offer an independent assessment of the ability of issuers to meet their debt obligations, thereby providing ―information services‖ that reduce information costs, increase the pool of potential borrowers, and promote liquid markets. Second, they offer ―monitoring services‖ through which they influence issuers to take corrective actions to avert downgrades via ―watch‖ procedures. A Moody‘s research in 2002 said that in the case of upgrades, that can mean greater capital market access and interest cost savings for issuers, and improved securities prices for investors. In the case of downgrades, it can mean higher capital costs for issuers, and portfolio turnover and losses for investors; most dramatically, however, it can terminate an issuer‘s access to capital, possibly even leading to default. Especially in the case of 7 downgrades, the potentially self-fulfilling nature of ratings requires that CRAs particularly endeavor to avoid ―false‖ negative predictions (Jerome S. Fons, Richard Cantor and Christopher Mahoney – 2002) 2.1.2.1 Foreign market In an analysis by Claire A. (2002), The World Big Three of credit rating agencies (CRA) are Standard & Poor‘s (S&P), Moody‘s, and Fitch Group. They cover approximately 96% of the world market. S & P and Moody‘s are the United State companies and account for 44.82% and 38.25% market share respectively. Meanwhile, Fitch Group is operated by a French and accounts for about 13.25% of market share. Other 4% Fitch Group 13% Standard & Poor's 45% Moody's 38% Figure 1: Market share of credit ratings agencies Source: US Securities and Exchange Commission (SEC) website, http://www.sec.gov/ (Accessed 18 Apr. 2011) 8 Table 2: Credit Rating Definition by the Big Three CRAs Source: Boehm Kristina (2013) Moody‘s Ratings Definition Fitch Ratings Definition Standard & Poor Ratings Definition ―Fitch Ratings‘ credit Moody‘s rates ratings provide an opinion publishes and ‖ a forward-looking opinion independent about the creditworthiness on the relative ability of an credit opinions on fixed of an obligor with respect to entity to meet financial income securities, issuers of a commitments ratings, as relative specific financial Credit securities and other credit obligation, a specific class opinions on obligations ranking of Investors of financial obligations, or a use Moody‘s specific financial program.‖ vulnerability to default, do ratings to help price the (Standard & Poor‘s 2013a). not imply or convey a credit risk of fixed income specific statistical securities or debts they may probability of default, buy, sell or lend.‖ (Moody‘s notwithstanding the 2013). agency‘s published default histories that may be measured against ratings at the time of default. Credit ratings are opinions on relative credit quality and not a predictive measure of specific default probability.‖ Fitch, 2013) 2.1.2.2 Vietnamese market According to Nguyen Duc Huong (2012), Vietnam CRAs are still very young, they are still in the process of building database and the credit rating system. Theirs credit rating system are borrowed from other CRAs around the world and have not been unified for 9 Vietnamese market yet. Moreover, the lack of expert is also a weak point for the credit rating industry in Vietnam. Currently, there are several CRAs in Vietnam, including : Credit Information Center (CIC) is a credit rating agency of the State Bank of Vietnam. The CIC‘s database is a unique database in Vietnam, which contains more than 600,000 business records and 20 million individual records. CIC mainly provides credit ratings of non-financial companies and their reports are used by both the State Bank of Vietnam and financial institutions. Vietnam Credit Information and Rating Company (Vietnam Credit) is the first rating agency in Vietnam. They have worked with corporate credit profile since 1996. Their reports based on the standards of the world‘s major institutions such as Standard & Poor‘s, Moody‘s, Fitch … VietnamCredit is a member of Asian Credit Information Gateway (ASIAGATE). Credit Ratings Vietnamnet Center (CRVC) started operations from June 2005. CRVC are sponsored by government offices and they refer to the evaluation process of the Big Three to build a consistent credit rating system in Vietnam. The Center recruits professional, researchers deep understanding of credit ratings. According to CRVC, on 09/08/2012 CRVC has signed an agreement with Risk Management Institute of the National University of Singapore (RMI), which is the leading research and training organization within the region in the fields of risk management, including credit ratings. To estimate credit ratings,: CRVC use 54 financial indicators, calculated from financial statements of the company. After that, they choose the most significant indicator and base on discriminant function and classification criteria to make CRVC‘ Credit ratings. For example they use the following function to determine the credit rating (the Z score) of firms: Z= -0,352 – 3,118X4 + 2,763 X 8 – 0,55X22 – 0,163X24 + 6,543X29 + 0,12X53 In which:  X4 is the ratio of total loans / total assets 10  X 8 is the ratio of working capital / total assets  X22 is the ratio of receivables / net sales  X24 is the ratio of receivables / liabilities  X29 is the ratio of profit before interest and taxes / total assets  X53 is the ratio of profit after tax / equity Table 3: Classification criteria Source:CRV.com.vn DISTINGUISHES TYPE Z> 1.7 AAA 0.85 [...]... lower credit ratings The study finds that credit ratings are an important determinant of the capital structures of firms and that there is a strong relationship between credit ratings and capital structures - The second empirical model examines the influence of the change of credit ratings between each year on the short term debt to equity of listed firms on Hochiminh stock exchange Consistent with the. .. ratings is an important consideration when firms make their capital structure decisions Their survey of 392 US firms‘ CFOs shows that they consider credit ratings as the second most important concern when they make their capital structure decisions (57% of the respondents consider credit ratings, while 59% of the respondents consider financial flexibility as their foremost concern) Following Graham... negative relationship between the range of credit ratings changes of the firm and the following short term debt to equity ratio? The implications of the credit rating – capital structure hypothesis are tested by examining whether firms follow a pattern of leverage change behavior after they have been changed in credit ratings 1.3 Contributions of the research Capital structure remains one of the most well...List of Figures Figures 1: : Market share of credit ratings agencies 8 Figures 2: Trade-off theory‘s Capital structure (The Optimal Capital Structure, the Value of the Firm and the Cost of Capital) .14 xi Abstract This research aims to examine the impact of credit ratings influencing the capital structure of listed enterprises on Hochiminh Stock Exchange The research data... results of Credit Ratings Vietnamnet Center (CRVC) 1.5 Scope and limitation This study focuses on testing the relationship between credit ratings and capital structure of companies listed on HOSE within 4 years, from 2009 to 2012 Therefore, this study has just conducted research on listed companies in HOSE, so the results cannot be applied to all unlisted companies and companies listed on HNX 1.6 Structure. .. choose long-term debt/total assets as her model‘s proxy Moreover, she did not examine the impact of credit ratings on capital structure Base for some reasons above, this opens a new direction for determining the impact of credit ratings on capital structure 1.2 Research questions Research questions As stated earlier, this research aims at examining the relationship between credit ratings and capital structure. .. and capital structure - Chapter 3 discusses the methodology adopted in the present study Specifically, it presents the data collection procedures, models and the variables for the two empirical chapters of the thesis - Chapter 4 investigates the relationship between the level of credit ratings and the leverage structure of listed firm on HOSE Specifically, it presents the descriptive statistics of the. .. debt) - Re: the return on equity (cost of equity) - Ro: the return on unlevered equity (cost of capital) - D: the value of debt - E: the value of levered equity - T: the corporate tax rate 2.2.1.3 .The Trade-off Theory According to Luigi P and Sorin V (2009), the original version of the trade-off theory grew out of the debate over the Modigliani Miller (1963) Following the telling of Naeem, Shammyla (2012),... cost into their models to explain a firm‘s choice of capital structure These studies suggest that firms can achieve a finite and an optimal capital structure by offsetting the present value of the tax shields and the expected cost of bankruptcy Trade off theory by Scott (1977) demonstrated that as the increase of the ratio of bonds, the risk of the company will also increase, thus raising the bankruptcy... maximize the value of their firm should seek to minimize the WACC of that firm 2.2.1.4.Pecking Order Theory In the process of the development of capital structure theory, Donaldson (1961) elaborated the Pecking order theory and this theory was clearly articulated by Myers (1984) There are some main point of this theory: Asymmetric information: Pecking order theory indicates that managers can use capital structure ... 11 2.2.1 Theories of capital structure .11 2.2.1.1 .The Irrelevance Theory of Capital Structure .11 2.2.1.2 .The Taxes theory of Capital Structure 12 2.2.1.3 .The Trade-off Theory ... Structure, the Value of the Firm and the Cost of Capital) .14 xi Abstract This research aims to examine the impact of credit ratings influencing the capital structure of listed enterprises on. .. firms make their capital structure decisions Their survey of 392 US firms‘ CFOs shows that they consider credit ratings as the second most important concern when they make their capital structure