Dissertations, Theses, and Capstone Projects

Date of Degree


Document Type


Degree Name





Armen Hovakimian

Committee Members

Jun Wang

Theodore Joyce

Joseph Weintrop

Subject Categories

Corporate Finance | Finance and Financial Management


capital structure, persistence, CEO effects, credit rating standards, public debt market, tradeoff theory


This dissertation consists of three chapters that examine capital structure determinants as well as the evolution of credit rating standards in the market for public debt.

Chapter 1 This chapter shows that firm fixed effects in panel leverage regressions act as a noisy proxy for managerial effects that drive persistence in leverage. Firms that do not change their CEO for prolonged periods of time are more likely to keep debt ratios within a narrow bandwidth and to display persistent differences in their time-series averages for up to 20 years. A CEO turnover is associated with considerable modifications to the financing policy of the firm. Significant capital structure changes take place immediately after a new executive takes office and leverage ratios remain relatively stable for the remaining tenure of the CEO. Lemmon et. al. (2008) argue that an unknown and time invariant factor is driving most of the variation in observed debt ratios, while DeAngelo and Roll (2015) find significant time-firm effects and short-lived leverage persistence. Capital structure stability at the CEO level introduces heterogeneity in the level of persistence across firms and provides a reconciliation of the conflicting evidence in the two studies.

Chapter 2 This chapter investigates the time-series variation in credit rating standards in the public debt market. The average credit rating of U.S. corporations has declined over the last 30 years. Existing literature attributes this decline to a systematic tightening of rating standards as opposed to any significant deterioration in the average credit quality of rated firms. This study finds empirical evidence that casts doubt on the notion that credit rating agencies have become more conservative over time. I find that the estimated proxy for rating standards is also capturing the effect of mispricing in the equity market as it is correlated to future stock returns. I propose an alternative specification of the credit rating model that incorporates the market-based risk characteristics of rated firms relative to those of other firms in the economy and argue that it better captures the information that credit rating agencies analyze in the rating process. Estimating the proxy for rating standards with the alternative model, I find no evidence of conservatism. Instead, the secular downward trend in credit ratings is due to changes in the economic climate that increase the risk of default. This result is important because changes in rating criteria that do not reflect variation in the credit risk of the underlying security undermine the usefulness of credit ratings to market participants. The findings of this study assert the consistency and informational value of credit ratings in the public market for corporate debt.

Chapter 3 This study examines what costs and benefits of debt are most important to the determination of the optimal capital structure. Prior literature has identified a set of variables that help explain the variation in observed leverage ratios. In the context of the dynamic tradeoff model, where firms do not immediately adjust to their target leverage ratio due to the presence of adjustment costs, some factors will inform the optimal capital structure, while others will cause firms to deviate from it. To isolate the variation in leverage due to differences in the target from that caused by deviations, I aggregate the data across a dimension that is likely to identify firms with similar targets – credit rating category. Estimating the traditional leverage regression on the aggregated data reveals size, profitability and tangibility as the most important proxies for the determinants of the target debt ratio. However, in contrast to theoretical priors, large and profitable firms have lower targets. Further analysis shows that size and profitability proxy for firms with lower non-financial risk and the benefits of a better credit rating outweigh the costs of foregone tax shields for those firms. Furthermore, while all firm characteristics are highly significant in the traditional leverage regression, they can only jointly explain about 20% of the variation in debt ratios across firms. On the other hand, the heterogeneity in leverage across rating categories is to a much larger extent determined by our proxies as the explanatory power of the model rises to close to 90% in that dataset.