An Inverse Problem Study: Credit Risk Ratings as a Determinant of Corporate Governance and Capital Structure in Emerging Markets: Evidence from Chinese Listed Companies

Manying Kang,Marcel Ausloos

doi:10.3390/economies5040047

Abstract

Credit risk rating is shown to be a relevant determinant in order to estimate good corporate governance and to self-optimize capital structure. The conclusion is argued from a study on a selected (and justified) sample of (182) companies listed on the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) and which use the same Shanghai Brilliance Credit Rating & Investors Service Company (SBCR) assessment criteria, for their credit ratings, from 2010 to 2015. Practically, 3 debt ratios are examined in terms of 11 characteristic variables. Moreover, any relationship between credit rating and corporate governance can be thought to be an interesting finding. The relationship we find between credit rating and leverage is not as evident as that found by other researchers for different countries; it is significantly positively related to the outside director, firm size, tangible assets and firm age, and CEO and chairman office plurality. However, leverage is found to be negatively correlated with board size, profitability, growth opportunity, and non-debt tax shield. Credit rating is positively associated with leverage, but in a less significant way. CEO-Board chairship duality is insignificantly related to leverage. The non-debt tax shield is significantly correlated with leverage. The correlation coefficient between CEO duality and auditor is positive but weakly significant, but seems not consistent with expectations. Finally, profitability cause could be regarded as an interesting finding. Indeed, there is an inverse correlation between profitability and total debt (Notice that the result supports the pecking order theory). In conclusion, it appears that credit rating has less effect on the so listed large Chinese companies than in other countries. Nevertheless, the perspective of assessing credit risk rating by relevant agencies is indubitably a recommended time dependent leverage determinant.

Highlights

Ashbaugh-Skaife et al (2006) investigated whether (894 S&P) firms with strong corporate governance benefit from higher credit ratings relative to firms with weaker governance.After controlling for firm-specific risk characteristics, it was found that “credit ratings are negatively associated with the number of shareholders and CEO power, and positively related to takeover defenses, accrual quality, earnings timeliness, board independence, board stock ownership, and board expertise”
According to Kisgen (2006), the company adjusts capital structure on the basis of different credit rating level; elsewhere, Kisgen (2009) showed that a manager engages in capital structure behaviors such as to set a minimum credit rating level goal, so that the company is more likely to decrease its debt as the rating downgrades
We focus on testing the relationship between capital structure and credit rating as well as corporate governance

Summary

Introduction

Ashbaugh-Skaife et al (2006) investigated whether (894 S&P) firms with strong corporate governance benefit from higher credit ratings relative to firms with weaker governance.After controlling for firm-specific risk characteristics, it was found that “credit ratings are negatively associated with the number of shareholders and CEO power, and positively related to takeover defenses, accrual quality, earnings timeliness, board independence, board stock ownership, and board expertise”. This connects to a puzzling question, raised by Ashbaugh-Skaife et al (2006), why some firms appear to be willing to bear additional debt financing costs by not practicing good governance. The Shenzhen Stock Exchange includes the main board, the SME board (initiated on 17 May 2004), and the Growth Enterprise Market (GEM) board As calculated by the China Securities and Futures Statistical Yearbook 2012, at the end of 2012, there were 2484 firms listed on the main boards of the two Stock Exchange covering about. The “B-shares” have about 107 listed companies and used other country currency, such as U.S or Hong Kong, so that the market was mainly limited to the foreign investor. N.B. Total market capitalization of B-shares is less than 0.5% of total market capitalization on the Shenzhen Stock Exchange and Shanghai

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