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1.1 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 the certain topic while conducting the research in a better way. The chapter also provides a brief background of the industry that has been chosen in the research for analysis so that the current situation of the retail sector may be gauged. Furthermore, the research includes objectives of the study 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 to provide 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 and issue new shares in the market for the purpose of preventing negative credit rating thereby striving to assume the debt within the company from speculative grades to investment grade. In this consideration, it has been found that CFOs consider credit rating as an important factor while deciding the capital structure of the company. Similarly, Kisgen (2008), mentioned that in a survey of credit rating and capital structure around 57.1 % of CFOs provided the view that they consider credit rating while determining the capital structure of the company or estimating the right blend or mix of debt and equity. Credit ratings are important for taking effective capital structure decisions because of given costs and benefits of discrete costs linked with the varying levels of ratings (Roberts and Sufi, 2009). For example Desai, Foley and Hines (2008), stated that investment in numerous bonds is dependent directly on the credit rating therefore, levels of credit ratings affect that whether the specific groups of individuals (like pension funds and banks) 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 provides information to the investor about the current position of the company thereby providing an idea about the quality of the company. In case the credit rating information is considered as important and more informative then a pool is made comprising of firms with similar ratings and so the change in ratings lead to discrete modifications in the cost of capital of the company (Chen and Kou, 2009). It has been found by Yu (2005), that credit rating is the ability of a firm to fulfil their financial commitments in accord to the previous dealing of a firm. Moreover, credit rating is an evaluation of the worthiness of a debtor for a business or a government regardless of the individual consumers. The evidence reflects that the credit rating plays an essential role in the capital structure of a firm. The management intends to issue new shares for the capital to downgrade credit rating and strived firm’s debt to upgrade from the speculative grade to the investment grade. According to Shin, Kim and Shin (2008), the credit scoring of a firm is the second highest concern for the CFO while determining the firm’s capital structure.

1.2.1 Retail Industry

According to Hutchinson, Donnell, Gilmore and Reid (2015), the retail sector involves spending of the customers in online as well as in the conventional stores. In the statistical perspective, the evidence reflects that in the UK, the consumers spend around £ 30 billion that illustrates for every £ 1 spent on the online and retail stores, the 42 P has been spent on the food, 41 pence spent on the non-food stores and 11 pence has been utilized for the automotive fuel of the consumers (The guardian, 2015) The graph mentioned above highlights the economic output of the retail sector of UK for the period of 2007 to 2014. In evidence to above graph, it is found that the retail sector contributes around £ 179 billion in the UK economic output for the year 2014 that has been increased by 11 % in the current period (Rhodes, 2014). In the view of Ward and Rhodes (2014), the total retail sales of the UK online stores have increased from 2.8 % to 11 % within the time frame of 2007 to 2013. Moreover, the total retail sales of the conventional stores have increased in the range of 3 % to 5 % for the each quarter of 2010 and 2011 (Rhodes, 2014). In perspective to the current year, the British retail sector is suffering from the slowdown in sales, where the food sales continued to fall in the recent three months of the current year (Rhodes, 2014).

1.3 Research Objectives

The major aim of the research is to analyze the Effect of Credit Scoring on the Capital Structure Decisions of a Firm in the case of retail sector. However, the major aim of the study can be stated as:

• To comprehend the concept of credit scoring
• To analyze the impact of credit scoring on the capital structure decisions of the firms
• To critically evaluate the effect of credit scoring on the decisions of capital structure of
  the retail industry in The UK
• To develop and give a set of recommendations to the organizations operating in the retail
  sector regarding the management of credit scoring.

1.4 Problem Statement

In accordance with the brief background on the research topic, the problem statement of the study can be drafted as: What are the effects of Credit scoring on the Capital Structure Decisions of a Firm in the case of retail sector?

1.4 Research Scope

The scope of the study defines areas that are being considered in the study. The scope of this particular research is based on the areas related to the retail sector of the UK, however, the two main components covered in this study includes credit scoring of the retail firms and the capital structure of a firm operating in the UK based retail sector. The researcher is also interested in analyzing the effects of the credit rating on the capital structure of a firm by gathering the secondary data from the official websites of the companies that are listed on the London Stock Exchange

1.5 Research Significance

The researcher is motivated in exploring the effects of the credit rating on the capital structure of a firm. The significance of the study is to evaluate the aspects of the credit scoring for the effective decision of a firm while undertaking the Stakeholder’s perception in an organisation. The researcher is interested to determine the effects of the credit scoring on the capital structure of a firm while evaluating the financial position of the selected firms for a predetermined time frame. Moreover, the researcher also seeks to evaluate the current capital structure of the firms by undertaking the existing debt and equity portion of the firms.

1.6 Structure of Dissertation

The structure of the current study can be stated as:

Chapter 1- Introduction:

The introduction is the first chapter of the research that intend to investigate the basic and essential components of the study in terms of research aim, research objectives, scope and significance of the research.

Chapter 2- Literature Review:

The Literature Review is the second chapter of the research that highlights the theories and models related to the research topic with the help of past researches and articles.

Chapter 3- Research Methodology:

Research Methodology is the third chapter of the study that intend to explain the tools and techniques used by the researcher to carry out the entire research process. The elements covered in this section include research strategy, research approach, philosophy and sampling technique, etc.

Chapter 4- Data Analysis:

The fourth chapter of the study is data analysis that usually presents the findings of the research. The aspects covered in this section include demographic analysis of the respondents, descriptive statistics and frequency analysis of the data.

Chapter 5- Conclusion and Recommendation:

The last chapter of the study is Conclusion and Recommendation that intend to summarize the entire research findings in a brief. The researcher has presented recommendations to the organizations, and the limitations of the research have also been mentioned in this study

1.7 Chapter Summary

In a nutshell, the discussion involved in this section reveals the essential components of the research. From the above discussion, it is found that the scope of this particular research is based on the areas related to the retail sector of the UK, that intend to study the two main components which includes credit scoring of the retail firms and the capital structure of a firm operating in the UK based retail sector. The major aim and brief objective of the research have been drafted along with the problem statement of the research. Moreover, the significance of the study has been covered in this section as the researcher is motivated in exploring the effects of the credit rating on the capital structure of a firm.