Credit Rating Research Articles

Tone or term: Machine-learning text analysis, featured vocabulary extraction, and evidence from bond pricing in China

We apply the machine-learning technique proposed by Zhou et al. (2024) to analyze credit rating reports in China’s bond markets, identifying featured vocabulary and generating text analysis scores. Compared with the traditional bag-of-words text analysis, evidence suggests three advantages of machine-learning scoring. Firstly, it covers featured vocabulary that compensates for missing information; secondly, it reduces misclassification of words’ sentiments; moreover, it mitigates the problem of equal weighting inherent in the bag-of-words method. Our findings indicate that the featured vocabulary neglected in the bag-of-words method plays a crucial role in text analysis and significantly contributes to bond pricing. Additionally, we find that machine-learning text analysis can address AAA rating inflation within China’s bond markets to some extent. In contrast, the bag-of-words method exhibits limited efficacy in mitigating this issue.

The effect of collateral on small business rationing of term loans and lines of credit

Theories of loan contracting in the presence of asymmetric information highlight the key role of collateral in mitigating against credit rationing. However, theory also allows for the use of collateral by ‘bad’ borrowers in order to receive better loan contract offers. In this study, we explore the extent to which collateral can affect the incidence of absolute loan denial and partial rationing associated with smaller loans than requested being offered. Using data from a large survey of UK small- and-medium enterprises, we find significant evidence on the negative effect of collateral. Our results also reveal important distinction between lines of credit and term loans, where the presence of collateral is associated with 3 % less term loan approved compared to overdraft. We argue that even the request (or offer) of collateral for a term loan indicates that either the bank or the firm believes it is a risky bet.

Effects of ESG performance and sustainability disclosure on GSS bonds’ yields and spreads: A global analysis

This study investigates the effects of the issuer's environmental, social, and governance (ESG) performance on both the issue-specific yield and its spread vis-à-vis a sovereign comparable. A sample of 3,960 green, social, and sustainable (GSS) bonds issued in global capital markets was used for this purpose. The findings indicate a negative association between ESG performance and bond spreads, implying that a greater commitment to sustainable transition today is an effective strategy for a company to reduce the cost of debt for future projects. The study includes a two-stage procedure. First, the effect of “fundamentals” (e.g., credit rating) on issue pricing is determined; second, the residuals are regressed against the ESG performance. While the latter's risk-reducing power does not appear to differ based on the divide between advanced economies and emerging markets, we find that the real enabler of curbing the unexplained portion of risk is detailed disclosure of the use of proceeds. This is likely to minimize the likelihood of greenwashing.

Can the construction of the social credit system improve the efficiency of corporate investment?

Based on the quasi-natural experiment of China's pilot reform of social credit system, this paper examines the effect and mechanisms of the construction of social credit system on corporate investment efficiency using the data of A-share listed companies in Shanghai and Shenzhen from 2005 to 2022. The study presents the following findings. First, the construction of social credit system significantly improves corporate investment efficiency, through three main paths: alleviating information asymmetry, improving internal corporate governance, and strengthening market competition pressure. Second, there is significant heterogeneity in the promotion effect of the construction of social credit system on corporate investment efficiency, which is more pronounced for non-state-owned enterprises and enterprises in monopolistic industries. Based on the above research conclusions, this paper puts forward policy suggestions such as establishing a comprehensive credit information sharing platform, promoting the credit rating system, strengthening credit supervision and risk early warning to improve the social credit system.

Operational Audit in Defining Credit Operation Rates

Objective: The objective of the study is to verify how the application of operational auditing in the rates of credit operations of a financial institution can instrumentalize management in the decision-making process. Theoretical Framework: In order to build the theoretical basis to interpret the empirical data, the authors reviewed the scientific literature that deals with operational auditing, internal controls, standards, regulations and legislation applied to auditing. Method: The methodology adopted comprises descriptive research, with a qualitative approach and a case study in a large financial institution, containing characteristics and mechanisms specific to the organization in question. Data collection through semi-structured interviews with the institution's managers, directly linked to credit operations, in addition to documentary survey and observation. Results and Discussion: The results of the research showed fluctuations between the positions of the audited financial institution, regarding the items highlighted in each criterion when defining the credit rate. It is also possible to identify high levels of irregularities in some criteria for defining the rates adopted. Implications of the Research: The research contributes to the literature through its practical propositions regarding the performance of operational audits, in which it was found that internal controls must be improved with the aim of reducing notes and irregularities found in the definition of rates for credit operations of the financial institution. Originality/Value: The research highlights the relevance of auditing in the qualification of internal controls and efficient management to combat errors or fraud, a topic that is still little explored in scientific literature.

Performance Evaluation and Risk Analysis of Mutual Funds: Insights from Recent Trends and Technological Advancements

Mutual funds, as a popular investment vehicle, pool resources from multiple investors to create diversified portfolios managed by professionals. This study explores the performance of mutual funds by analyzing various types, including equity, bond, and balanced funds, and their associated risks. Utilizing both primary and secondary data, the research evaluates mutual funds based on returns, investment patterns, and risk factors. It also examines the impact of recent technological advancements and regulatory changes on fund performance. The study highlights the benefits of mutual funds, such as diversification and professional management, while addressing potential risks including market, credit, and interest rate risks. By assessing the effectiveness of different mutual funds, the research aims to guide investors and improve capital allocation. The findings provide insights into how mutual funds contribute to individual financial goals and broader economic stability

Typology of smallholder maize farmers in South-Kivu, Eastern D.R. Congo: implications in improving farming practices and markets

Understanding the typology of smallholder maize farmers is crucial to elucidate the diversity in local farming systems, and therefore, devise effective interventions and policies that maximize the impact of agricultural innovations in South-Kivu province, eastern Democratic Republic of Congo (DRC). This study aimed at characterizing maize farmers in South-Kivu province and clustering them based on various socioeconomic and agronomic factors to identify specific production constraints and devise more effective interventions. A household survey among 300 South-Kivu maize farmers allowed to identify four distinct clusters based on farm size, land use, income, and agricultural technology adoption. The clusters ranged from resource-poor smallholder (Types 1 and 2) to medium-resource semi-innovative producers (Type 3) and highly equipped innovative farmers (Type 4). Key discriminative factors included total farm size, maize farm size, farming experience, access to agricultural credit, income, and innovation adoption rate. This study revealed specific constraints for each cluster, including low soil fertility, poor weed management, low market access, and labor scarcity. This study’s findings demonstrate the value of farm typology in guiding targeted interventions to address specific constraints and improve maize productivity, and suggest specific strategic directions for research and development projects in rural areas of the South-Kivu province.

Does a Change in the ESG Ratings Influence Firms’ Market Value? Evidence from an Event Study

In recent years, the field of “ESG finance” has seen rapid growth, resulting in the emergence and expansion of ESG ratings and rating agencies. This study investigates how financial investors react to updates in ESG ratings provided by two prominent ESG rating agencies, namely MSCI and Refinitiv. The main objective is to determine whether any positive or negative changes in a company’s sustainability ratings directly impact its market value. The Event Study methodology was used for this investigation, which analyses the Cumulated Average Abnormal Returns (CAARs) of economic events to assess their influence on corporate valuations. We analysed over 840 rating updates (events) using a sample of 75 companies across various industries, all listed on major stock exchanges. Our findings indicate that shifts in sustainability ratings, as evaluated by the two rating agencies, do not significantly impact companies’ market capitalisation. Furthermore, these outcomes remain consistent over time, suggesting that financial markets are not assigning increasing significance to ESG ratings. We offer potential explanations for these findings, which are discussed in light of the existing literature on the subject.

The effect of ASC 842 leases on bond yields

This study examines how the formal recognition of lease liabilities required by ASC 842 affects corporate bonds pricing. We document significant bond yield increases with the unexpected off-balance sheet liability revealed by the company. The yield reaction displays an asymmetric pattern, with an increase in yields for previously underestimated operating lease liabilities, but no correction for overestimations. Credit ratings are more likely to be downgraded at firms with severely underestimated operating leases. Collectively, our results suggest that ASC 842 has implications for corporate bond pricing.

Solving Investors’ Problems with Access to Evidence in Damages Litigation: Suggestions for a Future Issuer Liability Regime

AbstractPrivate enforcement’s role in the European secondary securities market is narrow. Issuer companies’ civil liability for violations of the inside information disclosure obligation is no exception. While trying to avoid the shadow of the US class action institution, European scholarship has long explored ways to increase the role of private enforcement in the securities market. Harmonising issuer liability is one of the suggestions to create a more prominent role for private enforcement. Even though harmonising issuer liability would be a welcome option for legal certainty and investor protection, it seems unlikely to happen in the near future. As an initial step towards potential harmonisation, this article analyses credit rating agencies’ (CRAs) liability and liability for competition law violations from the viewpoint of information asymmetry in litigation. It evaluates whether the legislative solutions in the CRA III Regulation and the Competition Damages Directive regarding plaintiffs’ access to evidence could be used as models for a potential issuer liability regime. The article finds that the choices made in the Competition Damages Directive could serve as viable models for issuer liability. The provisions in that Directive solve the information asymmetry between the plaintiff and the defendant by granting the plaintiff access to evidence in litigation through a court order.

Credit rating prediction using a fuzzy MCDM approach with criteria interactions and TOPSIS sorting

Credit rating prediction using a fuzzy MCDM approach with criteria interactions and TOPSIS sorting

Geopolitical risk and credit rating: evidence from North Korea’s threats

ABSTRACT We examine how geopolitical risk from North Korea’s threats affects South Korean firms’ credit ratings. North Korea’s threats, measured by the number of missiles launched, are negatively related to firms’ credit ratings. Employing a sample of South Korean public firms over the period 2012–2021, we find that the credit ratings of South Korean companies decrease with the number of missiles launched. Cross-sectional analyses indicate that the negative effect of North Korean risk differs depending on the firm characteristics. Specifically, firms with higher debt ratios are more significantly affected by North Korea’s threats. In addition, firms whose financial statements are audited by Big 4 auditors are associated with higher credit ratings than those by non-Big 4 auditors. Our findings contribute to the literature on geopolitical risk by identifying the effects of geopolitical risk on credit ratings.

The Determinants and Impacts of Capital Structure Complexity: A Review of Literature

This paper aims to provide a review of the determinants and impacts of capital structure complexity. The review covers papers from the Scopus and Web of Science databases from 2010 to 2020. A total of fifteen eligible articles were chosen for review. The search terms used “debt specialization," "debt diversification," "capital structure complexity," "debt complexity," "debt heterogeneity," and "debt concentration." We focus on the articles that discuss the determinants of capital structure complexity, the impacts of having a diversified capital structure, and the theories used to explain the relationships between them. The review indicates that capital structure complexity has significant impacts on company performance, credit rationing and future debt covenants. We conclude the review by offering a simplified diagram that shows a summary of the determinants and impacts of capital structure complexity. We hope the simplified diagram could assist future studies on capital structure complexity in different institutional contexts.

Credit ratings and management earnings forecasts: Evidence from the Dodd–Frank act

Credit ratings and management earnings forecasts: Evidence from the Dodd–Frank act

The investment grade and funds' portfolio allocation in Greek assets

The importance of investment funds for the global economy has increased in the aftermath of the global financial crisis. In the present paper, we focus on the case of Greece and the developments in investment funds’ portfolios, with a special emphasis on the period before the sovereign credit rating upgrade of Greece to investment grade. By means of a differences-in-differences estimator, we find that, in the aftermath of the change in Greece’s sovereign credit rating outlook to positive by the rating agency Standard and Poor’s (S&P), investment funds increased their holdings of Greek sovereign bonds in relation to other comparable euro area sovereign bonds. Next, in a dynamic panel data model setup we find that this increase in investment funds’ positions in Greek government bonds (GGBs) explains about 80% of the reduction in Greek sovereign bond spreads. Our results highlight the strong association between investment funds’ portfolio allocation and the underlying assets’ credit ratings, and provide incentives for continuing reforms that may lead to rating upgrades, as a means of increasing demand for Greek sovereign bonds and controlling the cost of debt. This is especially important when the monetary policy environment becomes tighter and interest rates, as well as the cost of funding, increase.

An Alternative Approach to Parliamentary Oversight of Sovereign Guarantees in South Africa

The research paper constructs and compares two structural risk models. A South African sovereign risk model and an ESKOM credit risk model. The interaction between these models explains the statistically significant causal relationship between corporate governance practices at the level of a public entity and government finance conditions between 2004 and 2019. It shows that a more effective approach to parliamentary oversight of government guarantees in South Africa can deliver better sovereign credit rating outcomes in post-COVID-19 South Africa. It will require proactive innovative measures in the application of government guarantees issued to SOEs aimed at improving institutional operational performance within a government-wide risk management framework. The paper concludes that economic transformation, with restitutive intent, is advanced with the adoption of a dynamic and evidenced-informed approach in addressing the complex interplay of prevailing socio-economic, government finance, and political environmental conditions in South Africa.

한중 양국 중소기업해외채권 회수제도 비교 연구

According to the Korea Trade Insurance Corporation, the amount of funds that have not yet received payment for exports in 2021 is 82 million US dollars (106.6 billion Korean won), and the total amount of accounts receivable in the past five years has reached 1.3 trillion Korean won. According to the Korea Trade Association, although the issuance scale of foreign bonds is increasing, the cumulative recovery rate is as low as around 30%. The average recovery rate of overseas accounts receivable owed by Chinese export enterprises is only 20%. Combined with a 5% export bad debt rate, it basically means that 4% of the annual export amount cannot be recovered. For small and medium-sized enterprises with weak risk resistance, cash flow is crucial for their survival. In general, there are two common ways to obtain compensation for uncollected debts: by purchasing pre export credit insurance or by seeking an ECA agency for agency recovery. The public export credit agencies (ECA) K-SURE and SINOSURE of the two countries are exploring the differences and similarities in overseas bond recovery systems, while hoping to provide better bond recovery methods for small and medium-sized enterprises and help with overseas bond recovery.

Understanding Credit Rating Agencies in India: A Comparative Perspective

This paper provides a descriptive analysis of the credit rating processes employed by major credit rating agencies in India, including CRISIL, ICRA, and CARE. The Indian economy's volatility poses challenges for investors, making the role of credit rating agencies crucial in assessing the creditworthiness of financial instruments. These agencies employ unique methodologies, rating instruments from AAA to D, based on various parameters, reflecting their risk assessments. While these ratings aid investors in making informed investment decisions, they also raise awareness about the associated risks, promoting cautious investment behaviour. The study highlights the similarities and differences in the methodologies used by these agencies, offering insights into their ratings' reliability and effectiveness. Key words: Credit Rating Agencies, Indian Economy, Investment Decision, Creditworthiness, Risk Assessment.

Time-Varying Role of House Prices on Monetary Policy in Türkiye

The main focus of this study is examining the time-varying effects of house prices on monetary policy in Türkiye from February 2010 to November 2021. We analyse these effects using a time-varying parameter vector autoregressive model with stochastic volatility (TVP VAR-SV). The evidence indicates that responses of inflation to positive house price shocks decrease over time. The response of credit and interest rates to positive house price shocks increases after 2018. The results reveal that the responses of the Central Bank of the Republic of Türkiye (CBRT) to the changes in the housing market have changed over time.

ESG Rating Divergence: Literature Review and Research Prospects

ESG (Environment, Social and Corporate governance) has become the core of the global sustainable development agenda, and the issue of rating divergence has increasingly attracted the attention of academia and industry. Compared to the international market, the research on ESG rating divergence in China is still in its infancy, and there are significant differences in the standards and systems adopted by different rating agencies. This article aims to comprehensively review and analyze the current situation of ESG ratings at home and abroad, the influencing factors of rating differences, and their economic consequences, and provide suggestions for the construction and optimization of China's ESG rating system. It is hoped to provide valuable references and guidance for further research and practice of domestic ESG ratings, thus providing effective guidance for stakeholders' decision-making.