A surreal illustration of a company's financial structure influenced by credit ratings.

Decoding Credit Ratings: How They Actually Impact a Company's Financial Health

Nico Varela in Business & Economy July 2025 • 4 min read.

"New research reveals the surprising ways credit ratings influence a company's capital structure, challenging long-held assumptions."

Why do companies choose the specific blend of debt and equity that they do? It’s a question that has stumped financial experts for decades. Despite countless hours of research, a clear and universally accepted answer remains elusive. The interplay of factors influencing a company's capital structure is incredibly complex, making it difficult to isolate the true drivers.

Now, a new study is shaking up the field. Researchers Helmut Wasserbacher and Martin Spindler have harnessed the power of double machine learning to take a fresh look at the impact of credit ratings on a company's leverage, or its debt-to-equity ratio. This innovative approach allows them to model the intricate relationships between a wide range of variables without imposing overly simplistic assumptions.

What they discovered challenges some conventional wisdom and offers a more nuanced understanding of how credit ratings really affect a company's financial choices. Get ready to dive into the surprising world of credit ratings and their hidden influence.

Credit Ratings Have a Real Impact: Unveiling the Leverage Connection

The research confirms that credit ratings do indeed have a causal effect on a company's leverage ratio. Simply put, having a credit rating at all, versus having no rating, increases a company's leverage by a significant margin. The study estimates this increase to be approximately 7 to 9 percentage points, which translates to a substantial 30% to 40% rise relative to the average leverage in the sample.

This finding suggests that companies actively seek and utilize credit ratings as a tool to manage their capital structure. However, this is where the story takes an interesting turn. The effect isn't uniform across all ratings; it's highly nuanced and depends on the specific rating a company receives.

AAA and AA Ratings: These top-tier ratings have a negative effect, actually reducing leverage by about 5 percentage points.
A and BBB Ratings: These investment-grade ratings have almost no effect on leverage, sitting near zero.
BB Ratings and Below: Here's where things shift. Lower ratings lead to a positive effect, exceeding 10 percentage points, increasing leverage.

This creates a fascinating picture. Companies with the highest creditworthiness (AAA/AA) may strategically reduce debt to maintain their pristine image. Those in the middle (A/BBB) maintain the status quo, while those with lower ratings (BB and below) use leverage more aggressively, possibly to fuel growth or navigate challenging financial conditions.

The Nuances of Credit Ratings and Financial Strategy

This new research provides a far more detailed picture of how credit ratings affect a company's financial decisions than previously understood. By using advanced machine learning techniques, the study reveals the nuanced and heterogeneous effects of ratings on capital structure. As the financial landscape evolves, understanding these complexities is critical for companies seeking to optimize their financial strategies.

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This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2406.18936,

Title: Credit Ratings: Heterogeneous Effect On Capital Structure

Subject: econ.gn q-fin.ec stat.ap

Authors: Helmut Wasserbacher, Martin Spindler

Published: 27-06-2024

Everything You Need To Know

How do credit ratings specifically influence a company's leverage ratio, according to the new research?

The research indicates that having any credit rating at all, as opposed to no rating, increases a company's leverage by 7 to 9 percentage points. However, the impact is not uniform. Companies with AAA and AA ratings see a decrease in leverage. A and BBB rated companies show almost no effect, while companies with BB ratings and below experience a significant increase in leverage, exceeding 10 percentage points. This demonstrates a nuanced relationship where higher-rated companies may reduce debt, while lower-rated companies might increase it.

What methodology did Helmut Wasserbacher and Martin Spindler employ to analyze the effects of credit ratings on capital structure?

They utilized double machine learning. This allowed them to model the complex relationships between various financial variables without making oversimplified assumptions. This approach facilitated a more detailed understanding of how different credit ratings affect a company's decisions regarding its debt-to-equity ratio, or leverage.

Why is understanding the impact of credit ratings on capital structure important for companies?

As the financial environment changes, comprehending these complexities becomes crucial for companies aiming to refine their financial strategies. The research reveals the heterogeneous effects of ratings on capital structure. Knowing how different credit ratings influence leverage helps companies make informed decisions about their debt and equity mix, which is vital for optimizing their financial health and supporting their strategic goals.

How do AAA and AA credit ratings affect a company's debt levels, and what strategic implications does this have?

Companies with AAA and AA ratings experience a *negative* effect, which leads to a reduction in leverage of about 5 percentage points. This likely reflects a strategic decision by highly creditworthy companies to maintain their strong financial standing and pristine image. By reducing debt, they signal financial stability and potentially benefit from lower borrowing costs, reinforcing their top-tier status.

What is the general impact of having a credit rating on a company's leverage compared to not having one, and what does this suggest about corporate financial behavior?

According to the study, simply possessing a credit rating, in contrast to having no rating at all, leads to a significant rise in a company's leverage ratio, estimated between 7 to 9 percentage points, which represents a 30% to 40% increase relative to the average leverage in the sample. This implies that companies actively seek and use credit ratings as a tool to manage their capital structure, shaping the mix of debt and equity they employ to finance their operations. The nuanced effects based on the specific rating received underscore the strategic importance of credit ratings in financial decision-making.