Credit Rating Changes and Leverage Adjustments: Concurrent or Continual?

Prior research has shown that credit downgrades affect firm's capital structure decision. However, after adjusting for biases associated with the use of market debt ratio and after controlling for simultaneity between credit ratings and leverage, we find that rating upgrades also play a role in firms' leverage. Contrary to previously reported findings, our evidence also indicates that the effect of rating downgrades on capital structure lasts for more than just one year.