![]() ![]() There has also been a call from market participants for them to provide more accurate ratings. That is because rating agencies have been put under higher scrutiny by regulators since the 2007-2008 financial crisis. Therefore, it would be interesting to extend the previous research to a new context by conducting a similar study on a GCC country during the period 2009 to 2016. As credit ratings represent an evaluation of the credit quality of the firm, credit ratings have the potential to play a very crucial role in financial decisions during and after a financial crisis ( Amrit and Korzhenitskaya, 2012). None of the previous studies have been conducted on the Gulf Cooperation Council (GCC) countries. (2016) found that imminent credit ratings change does not represent an important factor for non-financial Latin American firms when making capital structure decisions. On the other hand, Kemper and Rao (2013) could not confirm Kisgen’s (2006) conclusion despite applying the same methodology. Kisgen (2006) conducted a study on the US Compustat firms from 1986 to 2001 and concluded that credit ratings have a direct effect on the capital structure because of the discrete costs and benefits associated with each rating level. (2016) found that personal relationships between debt issuers and credit rating agencies have a positive effect on credit ratings.Ĭredit ratings, as a determinant of the capital structure, have not been studied sufficiently, and researchers have not reached a consensus on the relationship between credit ratings and capital structure ( Dasilas and Papasyriopoulos, 2015). This, in turn, can lead to restricted access to the international debt market and increased borrowing costs for these markets. They identified a number of internal and external factors of the credit rating business which, along with specific characteristics of the market, could cause negative and biased ratings of emerging market bonds. (2016) argued that credit ratings could disfavour emerging markets. Such requirements include minimum bank capital according to Basel II and capital adequacy requirements as per Basel III directives ( Hasan et al., 2015).Ĭonsidering the importance of credit ratings for businesses, investors and regulators, credit rating agencies are expected to provide impartial opinions ( Khatami et al., 2016). A number of financial requirements and regulations have been made contingent on firms’ credit ratings. The 2007-2008 financial crisis triggered efforts at different levels to reform financial market regulations. Rating agencies are paid by the firms being rated such revenue models in the rating business have been debated due to the possible conflict of interest between the desire of the issuers to get favourable ratings and the need of rating agencies to maintain accuracy and integrity in their ratings ( Becker and Milbourn, 2011). They help reduce information asymmetry and help uninformed investors to make wise investment decisions. Credit ratings are available free of charge to the public. The rating agencies also use different lettering systems which summarize their opinions about debt-issuing firms. Each rating agency uses its methodology of evaluating the creditworthiness of firms and their default risk. Internal factors which are firm-specific such as company size, profitability, liquidity, non-debt tax shield and asset tangibility ( Serghiescu and Văidean, 2014 Bandyopadhyay and Barua, 2016).Ĭredit ratings are the opinions of rating agencies about the probability that a debt-issuing firm will not meet its debt obligations ( Milidonis, 2013). Traditional studies have classified these factors into two categories: ![]() ![]() Therefore, a number of studies have been devoted to examining the factors that affect capital structure decisions. ![]() Capital structure decisions are essential to maximize shareholders’ wealth and the firm’s value as it is related to the way the firm finances its operations and long-term investment through a combination of debt and equity ( Proençaa et al., 2014 Dasilas and Papasyriopoulos, 2015). Making decisions about the capital structure is considered one of the most significant financial decisions in any firm ( Haron, 2014 Krichene and Khoufi, 2015 Kumar et al., 2017). The full terms of this licence may be seen at Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Published in ISRA International Journal of Islamic Finance. Copyright © 2019, Bora Aktan, Şaban Çelik, Yomna Abdulla and Naser Alshakhoori. ![]()
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