Corporate risk-taking with long-term, short-term and subordinate credit ratings

Abstract

PurposeThis study empirically examines, from the first quarter of 1981 until the fourth quarter of 2017, the relations across customary domestic issuer credit ratings (long-term, short-term and subordinate) and three popular corporate risk-taking measurements (the variability of operating profitability, net profitability, and research and development expenses).Design/methodology/approachThe author deploys categorical regressions and robustness tests with control variables, interaction terms, fixed effect variables, lag variables and delta variables.FindingsThe author documents that both short-term and subordinate domestic credit ratings are key determinants of the volatility of operating profitability. The author also identifies long-term credit ratings as secondary factors, yet they do affect broader corporate risk-taking behavioral features (along all three measurements). Furthermore, the author finds that the higher (lower) the credit ratings assigned, i.e. the superior (inferior) the credit quality externally judged, the more (less) overall risk firms tend to undertake.Originality/valueIt is the first research to examine both the inclusive influence and the granular effects of credit ratings on corporate risk-taking (CRT) behavior. It is also the only enquiry to inspect the specific relationships along three types of domestic issuer credit ratings: long-term, short-term and subordinate ratings.