Standard and Poor’s historical issuer credit ratings data were not readily accessible to the public and were not available from any financial database or website at the time of collection. For the present study, the data were purchased from the Standard and Poor’s. The credit rating data were only acquired for non-financial firms as per Standard and Poor’s classification criteria. Following Shyam-Sunder and Myers (1999), Rajan and Zingales (1995) and Kisgen (2006, 2009) for the US, and Ozkan (2000, 2001 and 2002) and Bevan and Danbolt (2004) for the UK, amongst others, financial firms, such as banks, insurance agencies and other financial institutions, are excluded from the sample. These firms may have a different capital structure, which may not be directly comparable with the capital structures of non-financial firms. For example, specifically in the banking sector, the requirements of minimum capital may directly affect the capital structure decisions of these firms. Additionally, insurance firms have investor insurance schemes such as deposit insurance, which are not comparable to the debt issued by non-financial firms (Rajan and Zingales, 1995). Following Barclay and Smith (1995), Guedes and Opler (1996) and Kisgen (2006, 2009), the dataset includes utility firms, as these firms actively acquire ratings, and the nature of the research questions allows for this inclusion. However, to be consistent with prior studies which have generally excluded regulated firms from their sample (e.g., Stohs and Mauer, 1996; Ozkan, 2000, 2001 and 2002; Shyam-Sunder
85 and Myers, 1999), the analysis is also carried out excluding utility firms. In addition, the effects of such inclusion are further controlled for by a dummy variable for utility firms.
5.1.2.1. Reason for Selecting Standard and Poor’s Ratings
The dataset acquired from Standard and Poor’s contained 355 UK rated firms. Standard and Poor’s is a reputable credit rating agency recognised by Nationally Recognised Statistical Rating Organizations (NRSRO) in the US (see Chapter 2, for more details). Although these rating agencies do not have any recognition criteria in the UK market, Standard and Poor’s, according to the Basel Committee on Banking Supervision (2000), is
among the well-recognised rating agencies in the UK market based on market recognition
(p.51). This report also suggests that as in the year 2000, Standard and Poor’s rating agency is also amongst the two rating agencies with the largest coverage of UK non- financial firms. (Table 5.1). However and as will be further discussed in Subsection 5.1.3, Standard and Poor’s are found to have the largest coverage of quoted public UK firms when datasets of different rating agencies are matched with Datastream. For example, the total number of firms rated by Standard and Poor’s are 119 compared to 48 by FITCH and 38 by Moody’s. Given that the present study employs only public firms with data available from Datastream, choosing the Standard and Poor’s database for rated firms is appropriate for sample selection.
Table 5.1
Corporate Ratings by Agency and Country (G10)
G10* Duff & Phelps FITCH Moody’s Standard and Poor’s US 434 245 2,645 2,224 UK 26 72 155 147 Japan 2 2 254 40 Netherlands 2 1 56 39 France 4 6 26 37 Sweden 2 1 21 19 Germany 1 1 18 18 Switzerland 0 0 11 13 Belgium 0 0 6 4 Italy 27 0 1 4
Source: Basel committee on banking supervision (2000).
* The report does not provide comparable figures for Canada
Another reason for using credit ratings from Standard and Poor’s is the availability of historical data. Historical long-term credit ratings data from other agencies are either not accessible or not suitable. For instance, A.M. Best mostly rates the financial sector, particularly the insurance sector (Duff and Einig, 2009) while for FITCH, only current data
86 on credit ratings as of 2009 was available. Duff and Einig (2009) also find that in the UK, the demand for smaller or specialised rating agencies is less and generally firms acquire ratings from either Standard and Poor's or Moody's or both. In some cases, however, firms also acquire FITCH ratings. The use of the Standard and Poor’s ratings is in line with prior
literature (Barclay and Smith, 1995; Kisgen, 2006 and 2009; Hovakimian et al., 2009)
which will facilitate a direct comparison with these studies.
Some previous studies, such as Stohs and Mauer (1996), also used Moody’s ratings for firm-years where Standard and Poor's ratings were not available. Therefore, Moody’s long- term issuer credit ratings data are also matched with Datastream to identify the firms rated by Moody's but not by Standard and Poor’s. The total number of firms obtained from
Moody's website was 12815 during 1988-2009 but data for only 38 firms were available
from Datastream. The matching of Standard and Poor's and Moody's datasets reveals that only 3 firms or 24 firm-years are not rated by Standard and Poor's. Given that prior studies have shown that both firms have issued nearly identical ratings (e.g., Beattie and Searle,
199216; Cantor and Packer, 1994), if only Standard and Poor's ratings are used presently, it
can be expected that the results will be qualitatively similar to alternative rating agency data. Moreover, as the data available from Moody's are inadequate, it is not economically feasible to conduct a separate analysis for this group of firms. The analysis in this study is therefore restricted to Standard and Poor's credit ratings.
5.1.2.2. Rationale for Selecting Domestic Long-Term Issuer Credit Rating
The dataset acquired from Standard and Poor’s contains the long and short-term issuer ratings for the UK firms. Consistent with the objectives of the study, the present study employs the long-term issuer’s ratings only. The use of the long-term issuer ratings is essential for the analysis, as it will help understand how the overall ability to pay debt obligations affects a firm’s overall financial decision making rather than investigating the effects on any specific debt commitment. The issuer credit ratings do not take into account any debt instrument specific risk such as its standing in bankruptcy, statutory preferences or enforceability of the obligation, and instead only provides an opinion of the obligator’s capacity to meet the obligations when they come due (Standard and Poor’s, 2008). The
15
It can be noted that the number of rated firms by Moody’s available on their website appear to be different from the number of rated firms reported by the Basel committee on banking supervision (2000). The difference may be because of the classification adopted by the authors of the committee’s report.
16 Beattie and Searle (1992) find a correlation of 0.97 between the ratings of Standard and Poor's and
87 overall ability to fulfil long-term obligations measured by long-term issuer credit ratings is also argued to play an important role in determining the ratings of specific debt issues (Langhor and Langhor, 2008). Another reason to choose long-term issuer credit ratings is the strong relationship between long-term credit ratings and short-term credit ratings (see Standard and Poor's corporate rating criteria, 2008), which allows the use of long-term credit ratings even for debt maturity structure analysis. Besides, the database acquired from Standard and Poor's firms mostly contains long-term issuer ratings and only a limited number of firms have short-term ratings. Finally, the selection of long-term ratings is well
in line with that employed in prior literature (e.g., Kisgen, 2006, 2009; Hovakimian et al.,
2009; Barclay and Smith, 1995; Stohs and Mauer, 1996; Rauh and Sufi, 2010).