Elements of corporate debt policy: Taxation and credit ratings

A firm will take into consideration several factors when establishing its debt policy. Two of these factors are the tax consequences of the debt and the credit rating that a bond issue will receive. As the integration of financial markets continues, these elements must often be viewed in an international context. This thesis aims to increase our understanding of the tax consequences of cross-border borrowings and the role of credit ratings in both domestic and global environments.; The first paper illustrates that the interest rate parity condition cannot hold on both a before and after tax basis. The cost of borrowing in alternative locations is rarely equivalent after taxes have been considered. The discrepancies between alternative costs of debt widen when foreign exchange gains are taxed differently than income. Using Shell Canada's New Zealand dollar transaction as an example, I illustrate the tax benefits of borrowing in foreign currencies and discuss how these benefits have changed under recent budget recommendations.; In order to secure cross-border debt, it is essential that companies obtain a bond rating from an agency viewed credibly by foreign investors. In the second paper, I examine the impact of Standard and Poor's acquisition of the Canadian Bond Rating Service on the securities of the rated firms. I suggest that the positive abnormal stock returns at the time of the acquisition are evidence of the benefit that a globally recognized rating agency may bring to Canadian firms.; The precise role of credit ratings is examined within the final chapter of this thesis. While some argue that a rating's primary function is to help investors set parameters for the institutions investing on their behalf, others believe that ratings provide additional information to the market. This chapter tests whether rating downgrades have valuable information content for equity securities. It does so in a unique way that depends on first estimating the likelihood of downgrade and then examining stock price reactions conditional on this likelihood. I find no evidence that information is revealed by rating changes.