Credit ratings and capital providers

Purpose We study how credit ratings shape firms' choice of capital providers (public vs private; debt vs equity), rather than only debt–equity proportions. Using 629 US non-financial firms (1999–2021) and mixed/nested logit models that relax IIA, we show that realised rating actions are more informative than anticipated ± signals. Design/methodology/approach Our study uses 13605 years observations on 629 firms and constructs quantitative limited dependent variables to represent managerial financing choices and analyse them using the Mixed Logit and Nested Logit models. Findings After an upgrade, firms shift toward internal/private equity (private debt −3.84 pp; private equity +3.82 pp). After a downgrade, firms shift toward public markets (public debt +2.57 pp; public equity +2.94 pp; private debt −4.03 pp). Results are robust to distress controls, rating boundaries (Investment grade and speculative grade), financial distress and leverage/liquidity-based specifications. Overall, ratings act as a screening and eligibility mechanism that influences firms' choice of capital providers, particularly following realised upgrades and downgrades. Originality/value Our results are unique to previous studies and highlight that credit ratings as discrete variables have discrete implications on managers' choices. Furthermore, we relax IID and IIA assumptions when estimating coefficients and ensure cross-elasticities are observed in probability estimation. To the best of our knowledge, we are first to combine all four main types of capital providers and design choice models to test the relationship.