Kulik V.L.Financial University under Government of Russian Federation, Moscow, Russian Federation venya.kulik@mail.ru
Importance The research focuses on the existing systems of rating, respective methodologies and weaknesses of these methods. Objectives We modify the methodology embedded into the existing rating systems and devise a brand new approach based on the appropriate application to discounted cash flows, discount of rating parameters, correct assessment of discount rates in line with financial ratios. Methods The research deals with the perpetuity range of the Brusov–Filatova–Orekhova modern theory of capital cost and capital structure. We also rely upon the modified theory for rating purposes and ranking coefficients. Results We modify the methodology of the existing rating systems and devise an absolutely new approach to it. Conclusions and Relevance Modifying the rating methodology, we make our own assessments more accurate and unbiased. Using the toolkit of the advanced theories, we reach new horizons of the rating practice, since it enables the rating segment to predominantly use quantitative methods. The proposed approach should be applied by all rating agencies in assessing the creditworthiness of issuers.
Keywords: rating, rating methodology, Brusov–Filatova–Orekhova theory, coverage ratio, leverage ratio
References:
Brusov P.N., Filatova T.V., Orehova N.P., Eskindarov M.A. Modern Corporate Finance, Investment and Taxation. Springer International Publishing, 2015, 368 p.
Brusova A.P. [Comparison of the methods for assessment of weighted average cost of capital and the value of its equity]. Finansovaya analitika: problemy i resheniya = Financial Analytics: Problems and Solutions, 2011, no. 34, pp. 36–42. URL: Link (In Russ.)
Myers S.C. Capital Structure. Journal of Economic Perspectives, 2001, vol. 15, iss. 2, pp. 81–102. URL: Link
Modigliani F., Miller M.H. The Cost of Capital, Corporate Finance and the Theory of Investment. TheAmerican Economic Review, 1958, vol. 48, no. 3, pp. 261–297.
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.
Modigliani F., Miller M.H. Some Estimates of the Cost of Capital to the Electric Utility Industry 1954–1957. TheAmerican Economic Review, 1966, vol. 56, no. 3, pp. 333–391.
Baker M., Wurgler J. Market Timing and Capital Structure. TheJournal of Finance, 2002, vol. 57, iss. 1, pp. 1–32. URL: Link
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
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
Brennan M., Schwartz E.S. Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure. TheJournal of Business, 1978, vol. 51, iss. 1, pp. 103–114.
Brennan M.J., Schwartz E.S. Optimal Financial Policy and Firm Valuation. TheJournal of Finance, 1984, vol. 39, iss. 3, pp. 593–607. URL: Link
Dittmar A., Thakor A. Why Do Firms Issue Equity? TheJournal of Finance, 2007, vol. 62, iss. 1, pp. 1–54. URL: Link
Drobetz W., Pensa P., Wanzenried G. Firm Characteristics and Dynamic Capital Structure Adjustment. URL: Link
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
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
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
Hamada R. Portfolio Analysis, Market Equilibrium, and Corporate Finance. TheJournal of Finance, 1969, vol. 24, iss. 1, pp. 13–31. URL: Link
Harris M., Raviv A. The Theory of Capital Structure. TheJournal of Finance, 1991, vol. 46, iss. 1, pp. 297–355. URL: Link
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
Hsia Ñ. Coherence of the Modern Theories of Finance. TheFinancial Review, 1981, vol. 16, iss. 1, pp. 27–42. URL: Link
Jalilvand A., Harris R.S. Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study. TheJournal of Finance, 1984, vol. 39, iss. 1, pp. 127–145. URL: Link
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
Jenter D. Market Timing and Managerial Portfolio Decisions. The Journal of Finance, 2005, vol. 60, iss. 4, pp. 1903–1949. URL: Link
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
Kane A., Marcus A.J., McDonald R.L. How Big is the Tax Advantage to Debt? TheJournal of Finance, 1984, vol. 39, iss. 3, pp. 841–853. URL: Link
Leland H.E. Corporate Debt Value, Bond Covenants, and Optimal Capital Structure. TheJournal of Finance, 1994, vol. 49, iss. 4, pp. 1213–1252. URL: Link
Post J., Preston L., Sachs S. Redefining the Corporation: Stakeholder Management and Organizational Wealth. Stanford, Stanford University Press, 2002, 376 p.
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