The Impact of Credit Rating and Frequent Refinancing on Firm Value

Posted: 27 Sep 2012 Last revised: 5 May 2015

See all articles by Sven Arnold

Sven Arnold

HHL Leipzig Graduate School of Management

Alexander D.F. Lahmann

Handelshochschule Leipzig (HHL)

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Date Written: December 5, 2012

Abstract

Rating affects corporate credit costs and leverage choices. Therefore, we develop a corporate valuation model where the choice of leverage is consistent with the implied cost of debt of the rating class. We explicitly model the trigger, the consequences, and the analytical probability of bankruptcy. Further, we develop a financing policy where the firm refinances with a predefined frequency. To conclude, we develop value implications of rating and financing policy which are in line with the trade-off theory in capital structure theory.

Keywords: Capital Structure, Financing Policy, Credit Rating, Bankruptcy, Tax Shield, Corporate Valuation, APV, WACC

JEL Classification: G13, G31, G32, G33

Suggested Citation

Arnold, Sven and Lahmann, Alexander D.F. and Schwetzler, Bernhard, The Impact of Credit Rating and Frequent Refinancing on Firm Value (December 5, 2012). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2153124 or http://dx.doi.org/10.2139/ssrn.2153124

Sven Arnold (Contact Author)

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
04019 Leipzig
Germany
+493419851663 (Phone)

HOME PAGE: http://www.hhl.de

Alexander D.F. Lahmann

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, 04109
Germany

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance ( email )

Jahnallee 59
D-04109 Leipzig
Germany
+49-341-9851-685 (Phone)
+49-341-9851-689 (Fax)

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