Do credit rating determine the capital structure decision; The moderating role of firm size among PSX listed firms

Abstract

This study examined the impact of firm’s credit rating on its capital structure with the moderating role of firm size among the listed non-financial firms on the Pakistan Stock Exchange (PSX). The sample included 73 firms covering the period from 2017 to 2020. Using the fixed effect panel mode, results revealed a negative significant impact of credit rating on a firm’s capital structure. Moreover, the findings also revealed that firm size moderated the relationship between credit rating and capital structure. It recommended to the local authorities like SBP, SECP, and Finance ministry to work and create encouraging policies for the growth of Pakistan’s bonds markets and enhancements of the credit rating agencies. Since this provides a low-cost alternative to firms for their financing decisions. Likewise, firms whose rating is close to the threshold of the speculative category may take some preventive measures to avoid further downgrading as they may miss out on the opportunity to use a low-cost channel of debt financing.