Home  Journals  Finance and Credit  3(771) - 2018 March

Improvement of rating methodology

Received: 6 February 2018

Received in revised form: 20 February 2018

Accepted: 6 March 2018

Available online: 29 March 2018

Subject Heading: BUSINESS VALUE

JEL Classification: G24, G32

Pages: 652—678

https://doi.org/10.24891/fc.24.3.652

Importance The article considers rating methodologies, their shortcomings and methods for improving these methodologies.
Objectives The paper aims to generalize a new approach to the rating methodology using the modern theory of cost and capital structure by Brusov-Filatova-Orekhova (BFO theory).
Methods The study uses the modern theory of capital cost and capital structure by Brusov-Filatova-Orekhova (BFO theory).
Results In this work, the methodological and systemic shortcomings of the existing credit rating of non-financial issuers have been analyzed. The financial rating coefficients are incorporated into the general case of the BFO theory. The dependence of the weighted average cost of capital WACC on two types of rating coefficients has been investigated.
Conclusions and Relevance Rating agencies, both international and Russian, should apply the developed approach when assessing the creditworthiness of issuers. The proposed method will allow to increase the correctness of various ratings making them more objective.

Keywords: rating methodology, modified Brusov-Filatova-Orekhova theory, coverage coefficient, leverage coefficient

References:

1. Brusov P.N., Filatova T.V., Orehova N.P., Eskindarov M.A. Modern Corporate Finance, Investment and Taxation. Springer International Publishing, 2015, 368 p.
2. Myers S.C. Capital Structure. Journal of Economic Perspectives, 2001, vol. 15, iss. 2, pp. 81—102. URL: Link
3. Modigliani F., Miller M.H. The Cost of Capital, Corporate Finance and the Theory of Investment. The American Economic Review, 1958, vol. 48, no. 3, pp. 261—297.
4. Modigliani F., Miller M.H. Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 1963, vol. 53, no. 3, pp. 433—443.
5. Modigliani F., Miller M.H. Some Estimates of the Cost of Capital to the Electric Utility Industry 1954—1957. The American Economic Review, 1966, vol. 56, no. 3, pp. 333—391.
6. Baker M., Wurgler J. Market Timing and Capital Structure. The Journal of Finance, 2002, vol. 57, iss. 1, pp. 1—32. URL: Link
7. Beattie V., Goodacre A., Thomson S.J. Corporate Financing Decisions: UK Survey Evidence. Journal of Business Finance & Accounting, 2006, vol. 33, iss. 9-10, pp. 1402—1434. URL: Link
8. Bikhchandani S., Hirshleifer D., Welch I. Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades. The Journal of Economic Perspectives, 1998, vol. 12, no. 3, pp. 151—170. URL: Link
9. Brennan M., Schwartz E.S. Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure. The Journal of Business, 1978, vol. 51, iss. 1, pp. 103—114.
10. Brennan M.J., Schwartz E.S. Optimal Financial Policy and Firm Valuation. The Journal of Finance, 1984, vol. 39, iss. 3, pp. 593—607. URL: Link
11. Dittmar A., Thakor A. Why Do Firms Issue Equity? The Journal of Finance, 2007, vol. 62, iss. 1, pp. 1—54. URL: Link
12. Drobetz W., Pensa P., Wanzenried G. Firm Characteristics and Dynamic Capital Structure Adjustment. URL: Link
13. Fama E.F., French K.F. Financing Decisions: Who Issues Stock? Journal of Financial Economics, 2005, vol. 76, iss. 3, pp. 549—582. URL: Link
14. Fischer E., Heinkel R., Zechner J. Dynamic Capital Structure Choice: Theory and Tests. The Journal of Finance, 1989, vol. 44, iss. 1, pp. 19—40. URL: Link
15. Graham J.R., Harvey C.R. The Theory and Practice of Corporate Finance: Evidence from the field. Journal of Financial Economics, 2001, vol. 60, iss. 2-3, pp. 187—243. URL: Link00044-7
16. Hamada R. Portfolio Analysis, Market Equilibrium, and Corporate Finance. The Journal of Finance, 1969, vol. 24, iss. 1, pp. 13—31. URL: Link
17. Harris M., Raviv A. The Theory of Capital Structure. The Journal of Finance, 1991, vol. 46, iss. 1, pp. 297—355. URL: Link
18. Hovakimian A., Opler T., Titman S. The Debt-Equity Choice. Journal of Financial and Quantitative Analysis, 2001, vol. 36, iss. 1, pp. 1—24. URL: Link
19. Hsia С. Coherence of the Modern Theories of Finance. The Financial Review, 1981, vol. 16, iss. 1, pp. 27—42. URL: Link
20. Jalilvand A., Harris R.S. Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study. The Journal of Finance, 1984, vol. 39, iss. 1, pp. 127—145. URL: Link
21. Jensen M.C., Meckling W.H. Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 1976, vol. 3, iss. 4, pp. 305—360. URL: Link90026-X
22. Jenter D. Market Timing and Managerial Portfolio Decisions. The Journal of Finance, 2005, vol. 60, iss. 4, pp. 1903—1949. URL: Link
23. Korajczyk R.A., Levy A. Capital Structure Choice: Macroeconomic Conditions and Financial Constraints. Journal of Financial Economics, 2003, vol. 68, iss. 1, pp. 75—109. URL: Link00249-0
24. Kane A., Marcus A.J., McDonald R.L. How Big is the Tax Advantage to Debt? The Journal of Finance, 1984, vol. 39, iss. 3, pp. 841—853. URL: Link
25. Leland H.E. Corporate Debt Value, Bond Covenants, and Optimal Capital Structure. The Journal of Finance, 1994, vol. 49, iss. 4, pp. 1213—1252. URL: Link
26. Post J., Preston L., Sachs S. Redefining the Corporation: Stakeholder Management and Organizational Wealth. Stanford, Stanford University Press, 2002, 376 p.
27. Myers S.C., Majluf N.S. Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics, 1984, vol. 13, iss. 2, pp. 187—221. URL: Link90023-0

View all articles of issue

ISSN 2311-8709 (Online)
ISSN 2071-4688 (Print)

Journal current issue

Vol. 30, Iss. 3 March 2024

Archive