Credit Rating Research Articles

ESG Rating Divergence and Trade Credit Financing : Promotion or Inhibition ?

ESG plays a key role in promoting sustainable development strategies. Data integrators integrate ESG-related information of enterprises and provide measurable reference for investors. However, different ESG rating agencies have different rating results for the same enterprise, which brings trouble to users in evaluating company information and formulating relevant investment strategies. This paper takes 2009-2022 Shanghai and Shenzhen A-share listed companies as the research object, and examines the relationship between ESG rating divergence and trade credit financing from the perspective of supply chain financing. The study finds that ESG rating divergence significantly inhibits the trade credit financing of enterprises, which is mainly achieved by aggravating the divergence of analysts ' forecasts and increasing the business risks of enterprises. Heterogeneity analysis shows that ESG rating divergence have a more significant inhibitory effect on trade credit financing in enterprises with high supply chain discourse power, strong supply chain stability and weak development ability. The conclusions of this paper are helpful to understand the economic consequences of ESG rating divergence and enrich the research on the influencing factors of trade credit financing.

CEO social media celebrity status and credit rating assessment

CEO social media celebrity status and credit rating assessment

Why Do Firms Issue Hybrid Bonds?

This study examines why firms issue hybrid bonds. Hybrid bonds can be structured so that they can be classified as either debt or equity under International Financial Reporting Standards (IFRS) and/or by credit rating agencies. We exploit this setting to examine whether firms consider leverage based on IFRS and/or credit ratings when structuring hybrid bonds. We find the following: First, unrated firms issue hybrid bonds that are classified as equity under IFRS if their IFRS-based leverage is higher. Rated firms issue hybrid bonds classified as equity by credit rating agencies if their credit rating is at risk and when their credit rating deteriorates. Second, drawing on the debt contracting value of accounting information and credit ratings, we expect and find that rated firms with stronger credit ratings issue hybrid bonds structured to be classified as equity solely by credit rating agencies but as debt under IFRS. Conversely, rated firms with a weaker credit rating and a higher default risk issue hybrid bonds that are classified as equity under IFRS and by credit rating agencies. Firms incur considerable interest costs when issuing hybrid bonds, suggesting that firms associate substantial benefits with an equity classification under IFRS and/or by credit rating agencies.

Unpacking Environmental, Social, and Governance Score Disparity: A Study of Indonesian Palm Oil Companies

This study investigates the inconsistencies in ESG scores assigned by different rating agencies. Focusing on two Indonesian palm oil companies, this paper examines the link between their reported sustainability performance and the resulting ESG scores. This study employs content analysis to assess how the companies disclose information around double materiality, stakeholder engagement, and certifications. Additionally, the methodologies used by two rating agencies are reviewed to identify potential misalignments. The analysis reveals discrepancies in the ratings, suggesting factors like differences in the level of engagement with each company and scoring methodologies might be at play. This highlights the need for standardized sustainability reporting and more transparent rating methodologies within the palm oil industry. While limited to two companies and two agencies, the findings can inform efforts to improve transparency both in sustainability practices and scoring methodologies. This would ultimately lead to more reliable ESG scores, benefiting all related stakeholders. To goal of this study is to promote responsible practices in the palm oil industry by emphasizing the impact of reporting practices.

Does the balance matter? The gender within government and municipal indebtedness

PurposeIt was to investigate whether gender diversity – gender balance – within political municipal government teams affected the municipal indebtedness. Government ideology, the gender of the mayor and the wealth of the municipal environment were considered as moderators.Design/methodology/approachWe used GMM estimators on two dynamic models and a sample of 144 Spanish municipalities with more than 50,000 inhabitants for the period 2013–2022.FindingsGender diversity within government teams reduces the municipal debt. Furthermore, the government right-wing ideology and the female gender of the mayor are robust moderators of the effects of the gender diversity within government teams on institutional indebtedness.Research limitations/implicationsThe differences in financial autonomy and powers to apply public policies by municipalities in the different countries, as well as some differential aspects within the right-wing ideological spectrum, may condition our findings. Within relational demography, gender diversity impacts municipal performance, opening the way to explore other relations in future research.Practical implicationsThe tendency to implement legislation to try to achieve high gender balances within political decision-making bodies generates higher gender diversity, and our research shows that it leads to a better financial performance, a matter of transcendental importance for EU, credit rating agencies, and lenders.Originality/valueThis study provides new knowledge about the effect of gender within political decision-making bodies on municipal budgetary management. It is the first research analysing the impact of gender balance in the strict sense within decision-making bodies on municipal indebtedness.

Friendly Boards and the Cost of Debt

For a sample of public bond issues by U.S. firms between 2000 and 2019, sourced from the Securities Data Corporation (SDC) New Issues database, we examine the relationship between CEO-friendly boards and the cost of debt. To explore this relationship, we construct proxies for board friendliness based on social connections sourced from the BoardEx database, classifying a board as friendly if it includes at least one outside director who has a social connection with the CEO. Our regression analysis reveals a negative association between CEO-friendly boards and yield spreads and a positive association between CEO-friendly boards and credit ratings. These effects exist after controlling for firm and bond characteristics based on prior literature. The results are robust to an alternative measure of board friendliness and potential endogeneity. These findings imply that firms with a CEO-friendly board experience a lower cost of bond financing. This supports the argument that effective communication between CEOs and directors contributes to the enhancement of creditor interests. Our results carry a practical implication that firms heavily reliant on debt should actively employ CEO-friendly boards. Despite the burgeoning literature on CEO-friendly boards, there is a lack of research on the relationship between CEO-friendly boards and the cost of debt. Our results fill this gap in the extant literature on CEO-friendly boards.

Managing ESG ratings disagreement in sustainable portfolio selection

In sustainable portfolio selection, investors have a twofold objective: they want to achieve the best compromise between portfolio risk and return, but they also want to take into account the sustainability of their investment, assessed through some Environmental, Social, and Governance (ESG) evaluation criteria. The inclusion of sustainable goals in the portfolio selection process may have an impact on the portfolio financial performance. ESG scores provided by the rating agencies are generally considered good proxies for the sustainability performance of an investment, as well as appropriate measures for Socially Responsible Investments (SRI). In this framework, the lack of alignment between ratings provided by different agencies is a crucial issue that inevitably undermines the robustness and reliability of these evaluation measures. In fact, the ESG rating disagreement may produce conflicting information, implying difficulty for the investors in the ESG evaluation of their portfolios. This may cause underestimation or overestimation of the market opportunities for a sustainable investment.In this paper, we deal with a multi-criteria portfolio selection problem, taking into account risk, return, and ESG criteria. For the ESG evaluation of the securities, we consider more than one agency and propose a new approach to overcome the problem related to the disagreement between the ESG ratings given by different agencies. For our three-criteria portfolio selection problem, we present an optimization model which adopts the so-called k−sum operator to formulate a concise ESG evaluation measure. The natural formulation of the model, in which the portfolio risk is measured by the variance of its returns, leads to a nonlinear program, but we show that it can be reformulated as an equivalent convex quadratic model. We also show that the model can be generalized to include any convex portfolio risk measures. An extensive empirical analysis of the out-of-sample performance of this model is provided on real-world financial data sets. From a theoretical viewpoint, our work extends the use of k−sum methodology to quadratic programming.

Move a Little Closer? Information Sharing and the Spatial Clustering of Bank Branches

Abstract We present a model of credit market competition to derive key hypotheses about how information sharing between banks influences the spatial clustering of their branches. We then test these hypotheses using data on 56,555 branches owned by 614 banks across 19 countries. We find that information sharing incentivizes banks to establish branches in localities that are new to them but that are already served by other banks. The resultant branch clustering is associated with reduced spatial credit rationing, as information sharing enables firms to access credit from more distant banks. These findings underscore how information sharing makes it more important for banks to move closer to each other rather than closer to their borrowers.

The Impact of The Sovereign Credit Rating on The Possibility of Financing External Loans to The Iraqi Economy

External loans are a source of credit revenue. The process of obtaining it requires determining the degree of credit risk by predicting the financial solvency of the economy to judge its financial ability to pay the principal and interest dues of the loan at the specified maturity date. Considering that ability is a determinant of the creditworthiness of his economy, the extent to which financing can continue with this external credit source and its cost. The government of Iraq faced the difficulty of financing external loans from the international capital markets with its high return due to the lack of a sovereign credit rating that measures the risk of default through a process to determine the degree of that risk for investors of external lending funds. Therefore, the research came to show the effect of determining the sovereign credit rating on the extent to which the Government of Iraq can finance foreign loans, whether from capital markets or foreign governments and the impact of this classification on the credit facilities granted. The research concluded that the economy of Iraq got a sovereign credit rating within the degree of creditworthiness according to the classification of speculation to reflect the possibility of default in payment due to the dependence of the financial solvency of its economy on oil revenues, as the credit risks rise due to the inability to pay in the event of a decline in prices in the foreign market. However, relative stability within the short term enabled the Iraqi government to obtain foreign loans, with the requirement that Iraq provide guarantees by foreign governments and institutions in exchange for this source of credit.

Keputusan Pemberian Kredit Kepada UMKM Dalam Peer-To-Peer Lending: Faktor-Faktor Apa Saja Yang Dipertimbangkan Investor?

This study aims to examine and demonstrate six factors influencing the decision to grant credit loans to MSMEs on the conventional Peer-to-peer (P2P) lending platforms Investree and Koinworks. These six factors are loan amount, loan term, credit rating, loan purpose, business duration, and financial statement information. A quantitative approach and secondary data from the publications of the Investree and Koinworks applications or websites were utilized in this research. A sample of 225 MSMEs was selected from a population of 267 using purposive sampling. Logistic regression analysis revealed that loan amount, credit rating, and loan purpose affect MSMEs on the Investree and Koinworks P2P lending platforms, while loan term, business duration, and financial statement information do not. These findings suggest that both P2P lending platforms consider various factors when evaluating MSME borrowers. The differences between Investree and Koinworks indicate distinct characteristics and appeals to MSMEs on each platform, which are also discussed in this study. The results of this research can assist MSMEs in preparing loan proposals to enhance credibility with lenders, provide better insights to lenders in decision-making, and serve as a reference for other P2P lending platforms in evaluating factors necessary for credit loan decision-making processes.

Exploring Prospects for Innovation in India's Financial System via Green Financing

Green financing (GF) allows countries to foster economic growth while promoting environmentally sustainable practices through innovative advancements in the financial sector. This concept warrants examination in countries like India. The paper evaluates the potential of GF in India. Findings reveal a predominant focus on renewable energy within India's green financing landscape, followed by the construction and transportation sectors. However, the growth of green bonds, a key financial instrument, is hindered by their low credit rating. To foster the development of GF, a collaborative effort among government bodies, financial institutions, policymakers, private sector entities, and non-governmental organizations is imperative for market expansion and risk mitigation.

Impact of credit rating downgrades and tightness of accounting standards on earnings management in listed SMES

Due to its nature, funding remains the main problem for listed small and medium-sized enterprises (SMEs) globally. To overcome such a problem, there is a trend of using credit rating as the benchmark to appraise funding opportunities and applications in listed SMEs. As credit rating levels vary across time, subject to the performance of the listed SMEs, changes in the credit rating levels might trigger attention from listed SMEs, and actions might then be taken by the management to ensure that the credit rating is at the desired level. Since the literature in this strand of study is limited, this study aimed to examine the effect of credit rating downgrade and tightness of accounting standards on earnings management in listed SMEs. Employing a 2x3 between-subjects experiment manipulating credit rating downgrades (category or notch) and tightness of accounting standards (less tight, moderately tight, tight), it is evidenced that credit rating downgrades, especially notch downgrades, lead to more earnings management behaviors in the presence of a tight and less tight set of accounting standards. Different classifications of credit rating downgrades – notches and categories – will have different implications for earnings management based on the extent to which they are subject to external monitoring. As a practical matter, it is recommended that regulators exercise equal monitoring regardless of whether credit rating downgrades occur by category or notch.

Consensus credit ratings: a view from banks

While the production of credit ratings has long been limited mainly to rating agencies (CRAs), recent years have seen the growing popularity of consensus credit ratings crowdsourced from banks (i.e., bank ratings). We provide the first comprehensive examination of the properties and informativeness of bank ratings relative to CRA ratings. We find that bank ratings often deviate from CRA ratings, with over 60% of firm-months having different bank and CRA ratings. These deviations contain useful information. Bank ratings improve out-of-sample prediction of defaults and CRA rating revisions and explain the cross-section of credit spreads. However, bank ratings do not improve out-of-sample prediction of credit excess returns, indicating that current prices incorporate bank rating information. Overall our findings suggest that bank ratings are a useful supplement to traditional credit ratings.

Sovereign Credit Risk in Saudi Arabia, Morocco and Egypt

The purpose of this paper is to assess and predict sovereign credit risk for Egypt, Morroco and Saudi Arabia using credit default swap (CDS) spreads obtained from the DataStream database for the period from 2009 to 2022. Our approach consists of generating the implied default probability and the corresponding credit rating in order to estimate the term structure of the implied default probability using the Nelson–Siegel model. In order to validate the prediction from the probability term structure, we calculate the transition matrices based on the implied rating using the homogeneous Markov model. The main results show that, overall, the probabilities of defaulting in the long term are higher than those in the short term, which implies that the future outlook is more pessimistic given the events that occurred during the study period. Egypt seems to be the country with the most fragile economy, especially after 2009, likely because of the political events that marked the country at that time. The economies of Morocco and Saudi Arabia are more resilient in terms of both default probability and credit rating. These findings can help policymakers develop targeted strategies to mitigate economic risks and enhance stability, and they provide investors with valuable insights for managing long-term investment risks in these countries.

Does a country’s sovereign credit rating drive capital inflows into emerging European markets? Evidence from Balkan region

This study investigates the impact of sovereign credit ratings on capital inflows and their composition for emerging European economies in the Balkan region. This study sheds light on this nexus by selecting Bulgaria, Croatia, Greece, Romania, and Slovenia between 2006-2018 using panel data analysis. The estimation results underscore that a sovereign credit rating is a significant driver of capital inflows, and a decline in sovereign credit risk leads to increased foreign direct investment and portfolio inflows. Furthermore, the estimation results demonstrate the importance of the country’s specific pull factors and reveal that a country characterized by a larger market size, better institutional quality, a stable macroeconomic environment, and a more developed financial market could attract more capital inflows. Moreover, the results highlight that global risk and liquidity push factors have a significant effect on driving cross-border capital inflows into the Balkan economies. The findings suggest that policymakers should reduce sovereign credit risks and increase the country’s absorptive capacity and competitiveness in order to attract more capital inflows to the investigated Balkan countries.

Deposit Money Bank Credit and Non-Oil Export in Nigeria

The non-oil sectors play a crucial role in driving in­dustrial transformation and generating foreign exchange for a nation. Therefore, the performance of this sector is influenced by the implementation of policies and programs, as well as the availability of credit facilities from deposit money banks (DMBs). This study examines the relationship between DMBs' credit and non-oil exports in Nigeria from 1986 to 2022. The data is analysed using the bounds test co-integration procedure of Autoregressive Distributed Lag (ARDL). The results indicate that there is a significant (Prob. < 0.05) positive relationship be­tween DMBs' credit and exchange rates. Furthermore, DMBs' lending rate and inflation rate demonstrate a significant nega­tive relationship, while gross fixed capital formation shows an inverse relationship with non-oil exports in Nigeria. The cau­sality test reveals no causality between bank credit to non-oil sectors, exchange rate, and the volume of non-oil exports in Ni­geria. However, there is a unidirectional causality between gross fixed capital formation, the lending rate of banks, the in­flation rate, and non-oil exports in Nigeria. Based on these find­ings, it is recommended that both the government and the monetary authorities make concerted efforts to stabilise the macroeconomic variables and promote growth-oriented programs meant to boost the aim of enhancing the production of locally produced goods in the non-oil sectors of Nigeria. Additionally, the Central Bank of Nigeria should consider re­ducing the bank rate, as this would directly impact other rates within the country.

Creditors’ Role in Shaping Asymmetric Cost Behavior: Evidence from Debt Covenant Violation

ABSTRACT This study uses covenant violations as a quasi-natural experimental setting to examine creditors’ roles in shaping corporate cost behavior. Using a regression discontinuity design, I find that cost stickiness experiences a sharp decline following debt covenant violations when control rights are transferred to creditors. The cost stickiness effect is more substantial for borrowers with lower credit ratings and when creditors possess greater bargaining power. The effect is also more pronounced during industry downturns when borrowers have fewer alternative sources of finance. Results are consistent when I use alternative measures of cost stickiness and alternative research designs. Overall, my evidence indicates that creditors play a monitoring role in firms’ cost behaviors and identifies a specific channel (loan covenants) through which the misalignment of incentives can impact cost asymmetry. JEL Classifications: D24; G32; M41.

기업의 지배구조와 신용등급 간의 비선형성에 대한 연구

This study examined whether there is a nonlinear characteristic between the independence of the audit committee and the credit rating that can function as a monitoring body. In addition, it was examined whether the results of this analysis have significant differences depending on the audit corporation. The analysis results show that, first, the independence of the audit committee showed a significant nonlinear relationship with the credit rating and credit rating of corporate bonds. This indicates that the independence of the audit committee increases to a certain level or higher, so that the more sufficient control and monitoring effects exist, the higher the credit rating can be. Second, the nonlinear relationship between the independence of the audit committee (the ratio of appointments) and the credit rating was significant in Big4 audit firms than in Non-Big4 audit firms.

Effects of Türkiye’s Credit Rantings and Credit Default Swaps (CDS) on BIST ALL

In the study, the relationship between Turkey's Credit Default Swaps (CDS) premiums and credit ratings of Standard and Poor's (S&P), Moody's Investors Service (Moody's) and Fitch Ratings (CRA) and the BIST ALL index listed in Borsa Istanbul and The aim is to observe their effects on each other. The universe of the study; consists of 3956 daily Turkey CDS credit risk premiums and BIST ALL data and 93 credit ratings given by CRAs in the period 2009:1–2024:4. The effect of the increase or decrease in CDS and credit scores on the closing values of the BIST ALL index was analysed with Johansen cointegration and Granger causality tests. Findings obtained in the study; Increasing the credit rating and outlook of CRAs causes an increase in BIST ALL closing values in the short term. The change in Türkiye CDS premiums triggers changes in BIST ALL closing values in the short and long term. Finally, the study concluded that the change in CDS premiums has a negative effect on BIST ALL, while the increase in credit score and outlook has a positive effect on BIST ALL.

국제회계기준(IFRS) 도입에 따른 부동산 가격이 국가 재정건전성에 미치는 영향

Due to the COVID-19 virus outbreak, inevitable welfare spending has increased sharply, and as the national debt has increased sharply, international credit rating agencies have considered downgrading Korea's credit rating. However, the Korean government has provided support for supplementary budgets and welfare policies, and as a result, national debt is increasing and national Financial soundness is deteriorating. Accordingly, based on previous studies, this study aims to present real estate-related policy measures that can fundamentally improve the national fiscal soundness so that the national credit rating is not degraded by studying how asset revaluation gains and comprehensive real estate taxes caused by real estate price increases affect national fiscal soundness indicators based on International Accounting Standards (IFRS). As a result of the study's analysis, the introduction of international accounting standards resulted in conditional results that 'an increase in the declared value of real estate can be positive for the national fiscal soundness', and in this study, four policy improvement measures related to real estate were proposed. Through these policy implications and fiscal policies such as institutional improvement measures, the government is expected to improve the national fiscal soundness while maintaining the national credit rating.