"TopicTo analyze The Effect of Credit Scoring on the Capital Structure Decisions of a Firm: Case ofRetail Industry 2AbstractPurpose: The major aim of the research is to analyze the Effect of Credit Scoring on the CapitalStructure Decisions of a Firm in the case of retail sector. Background: It has been found that managers of different companies make efforts and issuenew shares in the market for the purpose of preventing negative credit rating thereby striving toassume the debt within the company from speculative grades to investment grade. In thisconsideration, it has been found that CFOs consider credit rating as an important factor whiledeciding the capital structure of the company. Credit rating is essential for investors because itprovides information to the investor about the current position of the company thereby providingan idea about the quality of the company. Research Methods: The research understudy follows explanatory research design along with thewith the survey strategy because interviews have been conducted. The study followsinterpretivism and positivism research philosophies while the technique that has been used isboth quantitative, as well as qualitative for gathering the data. Quantitative data has beengathered from annual reports and authentic website like Morning star. Data Findings: The results of indicate that there is no relationship between credit scoring andcapital structure decisions taken by the companies in the retail sector of the UK. The credit ratingof Morrison and Debenhams Plc are attractive as compared to other retail companies; however,Tesco?s credit score declined in 2013 and 2014. Moreover, the data reveals that decisions relatedto debt are taken regardless of the credit score of the companies; nevertheless, credit scoreprovides the creditor with an idea of lending money to specific company. Recommendations: The companies in the retail sector are advised to make regular payments ofloans and choose the creditor who offers attractive credit terms. The companies are suggested toconstantly track the credit report of the company so as to timely make the effective decisionswhile repairing the credit scores. 3AcknowledgementI am using this opportunity to express my gratitude to everyone who supported me throughoutthe course of this project. I am thankful for their aspiring guidance, invaluably constructivecriticism and friendly advice during the project work. I am sincerely grateful to them for sharingtheir truthful and illuminating views on a number of issues related to the project.I would also like to thank my project external guide and all the people who provided me with thefacilities being required and conductive conditions for my MBA project. 4Table of ContentsAbstract ........................................................................................................................................... 2Acknowledgement .......................................................................................................................... 3Chapter 1: Introduction ................................................................................................................... 91.1 Introduction ........................................................................................................................... 91.2 Research Background ........................................................................................................... 91.2.1 Retail Industry .............................................................................................................. 101.3 Research Objectives ............................................................................................................ 111.4 Problem Statement .............................................................................................................. 111.4 Research Scope ................................................................................................................... 121.5 Research Significance ......................................................................................................... 121.6 Structure of Dissertation ..................................................................................................... 121.7 Chapter Summary ............................................................................................................... 13Chapter 2: Literature Review ........................................................................................................ 142.1 Introduction ......................................................................................................................... 142.2 Credit Scoring ..................................................................................................................... 142.2.1 Improvement in Credit Score ....................................................................................... 162.2.2 Credit Reference Agencies .......................................................................................... 172.3 Credit scoring models ......................................................................................................... 172.4 Importance of credit score .................................................................................................. 192.5 Capital structure and Weighted Average Cost of Capital ................................................... 192.6 Capital structure theories .................................................................................................... 202.7 Other factors impacting capital structure decision.............................................................. 242.8 Capital Structure Ratios ...................................................................................................... 24 52.9 Impact of credit scoring on capital structure decisions ....................................................... 252.10 Research gaps.................................................................................................................... 262.11 Research Framework ........................................................................................................ 262.12 Hypothesis......................................................................................................................... 272.13 Chapter summary .............................................................................................................. 27Chapter 3: Research Methodology................................................................................................ 293.1 Chapter Introduction ........................................................................................................... 293.2 Research Methodology ....................................................................................................... 293.2.1 Research Strategy......................................................................................................... 303.2.2 Research Approach ...................................................................................................... 303.2.3 Research Philosophy .................................................................................................... 303.2.4 Research Design........................................................................................................... 313.3 Data Collection Sources ...................................................................................................... 313.4 Sampling Technique and Sample Size ................................................................................ 323.5 Data Analysis ...................................................................................................................... 323.6 Ethical Considerations ........................................................................................................ 333.7 Chapter Summary ............................................................................................................... 33Chapter 04: Data Analysis ............................................................................................................ 344.1 Introduction ......................................................................................................................... 344.2 Data Analysis ...................................................................................................................... 344.2.1 Interview Analysis .................................................................................................. 344.2.2 Quantitative Analysis .............................................................................................. 384.3 Hypotheses Assessment ................................................................................................. 464.4 Summarised Findings.......................................................................................................... 464.5 Chapter Summary ........................................................................................................... 47 6Chapter 05: Conclusion and Recommendations ........................................................................... 485.1 Introduction ......................................................................................................................... 485.2 Discussion ........................................................................................................................... 485.3 Personal Reflections............................................................................................................ 495.4 Areas of Future Study ......................................................................................................... 505.5 Practical Implications.......................................................................................................... 505.6 Limitations of the Study...................................................................................................... 515.7 Recommendations to Retail Sector ..................................................................................... 515.8 Chapter Summary ............................................................................................................... 52References ..................................................................................................................................... 53Appendix ....................................................................................................................................... 58 7List of TablesTable 1: Correlation Analysis ....................................................................................................... 41Table 2: Regression Analysis - Interest Coverage ratio ................................................................ 42Table 3: Regression Analysis - Financial Leverage ..................................................................... 44Table 4: Regression Analysis - Debt to Equity ............................................................................. 45Table 5: Hypotheses Assessment Table ........................................................................................ 46 8List of FiguresFigure 1: Model of Credit Score Factors ...................................................................................... 16Figure 2: Credit Scoring Models................................................................................................... 18Figure 3: MM No Tax Model ....................................................................................................... 21Figure 4: MM with Tax World ..................................................................................................... 22Figure 5: Traditional Theory ......................................................................................................... 23Figure 1: Research Onion ............................................................................................................. 29 9Chapter 1: Introduction1.1 Introduction The first chapter of the research is introduction and deals with introducing the topic of research.This chapter includes background of the topic so as to understand the setting and origin of thecertain topic while conducting the research in a better way. The chapter also provides a briefbackground of the industry that has been chosen in the research for analysis so that the currentsituation of the retail sector may be gauged. Furthermore, the research includes objectives of thestudy that are to be achieved in the conduct of this research along with the problem statement.Henceforth, the chapter includes scope and significance of the topic of the research so as toprovide the rationale for the selection of the topic. 1.2 Research Background In the view of Kisgen and Strahan (2010), managers of different companies make efforts andissue new shares in the market for the purpose of preventing negative credit rating therebystriving to assume the debt within the company from speculative grades to investment grade. Inthis consideration, it has been found that CFOs consider credit rating as an important factor whiledeciding the capital structure of the company. Similarly, Kisgen (2008), mentioned that in asurvey of credit rating and capital structure around 57.1 % of CFOs provided the view that theyconsider credit rating while determining the capital structure of the company or estimating theright blend or mix of debt and equity. Credit ratings are important for taking effective capitalstructure decisions because of given costs and benefits of discrete costs linked with the varyinglevels of ratings (Roberts and Sufi, 2009). For example Desai, Foley and Hines (2008), statedthat investment in numerous bonds is dependent directly on the credit rating therefore, levels ofcredit ratings affect that whether the specific groups of individuals (like pension funds andbanks) should make investment in the bonds of the company or not. Yu (2008) highlighted that credit rating is essential for investors as well because it providesinformation to the investor about the current position of the company thereby providing an ideaabout the quality of the company. In case the credit rating information is considered as importantand more informative then a pool is made comprising of firms with similar ratings and so the 10change in ratings lead to discrete modifications in the cost of capital of the company (Chen andKou, 2009).It has been found by Yu (2005), that credit rating is the ability of a firm to fulfil their financialcommitments in accord to the previous dealing of a firm. Moreover, credit rating is an evaluationof the worthiness of a debtor for a business or a government regardless of the individualconsumers. The evidence reflects that the credit rating plays an essential role in the capitalstructure of a firm. The management intends to issue new shares for the capital to downgradecredit rating and strived firm?s debt to upgrade from the speculative grade to the investmentgrade. According to Shin, Kim and Shin (2008), the credit scoring of a firm is the second highestconcern for the CFO while determining the firm?s capital structure. 1.2.1 Retail IndustryAccording to Hutchinson, Donnell, Gilmore and Reid (2015), the retail sector involves spendingof the customers in online as well as in the conventional stores. In the statistical perspective, theevidence reflects that in the UK, the consumers spend around £ 30 billion that illustrates forevery £ 1 spent on the online and retail stores, the 42 P has been spent on the food, 41 pencespent on the non-food stores and 11 pence has been utilized for the automotive fuel of theconsumers (The guardian, 2015). Graph 1: Economic Output of the Retail Sector(Source: Rhodes, 2014). "