Higher Credit Ratings Research Articles

Does the impact of credit rating downgrade on bond returns vary by region: Empirical evidence from China

Utilizing trading data from corporate and enterprise bonds that experienced credit rating downgrades between 2012 and 2022, this study employs event study methodology and regression analysis to examine the regional differences in the impact of credit rating downgrades on bond pricing and the mechanisms behind these effects. The study found that, during the window period when the bond credit rating is downgraded, there is a significant difference in the cumulative abnormal return of bonds between the eastern and non-eastern regions. Heterogeneity analysis indicates that bonds with higher credit ratings and those issued by non-state-owned enterprises are more significantly affected by credit rating downgrades. This study provides empirical evidence of regional disparities in the impact of credit rating downgrades, and proposes a theoretical mechanism whereby differences in the degree of marketization influence these effects through varying expectations of government implicit guarantees. The findings offer a theoretical foundation for optimizing decision-making by participants in the Chinese bond market.

Financial statement disaggregation and bank loan pricing

We analyze whether the disaggregation quality (DQ) of a borrower's financial statement is associated with its bank loan pricing. We find that firms with high DQ have low spreads on their bank loans. This result is more pronounced for firms with positive financial prospects, higher risk, and no prior banking relationship with the lenders. Moreover, a high DQ is associated with a low total cost of borrowing, high credit rating, and low spreads on bond issues. Overall, our results show that disaggregated financial statements facilitate bank loan pricing by enabling lenders to make better predictions of their borrowers’ future performance.

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.

가계부채 관리를 위한 주택담보대출 부분조기상환의 특성에 관한 연구

This study empirically analyzes the characteristics and determinants of partial prepayment. Using data from the KHF, this study divides the prepayment of fixed-rate mortgage loans into partial and full payments. The analysis results are summarized as follows. First, the partial payment scale indicated 25.4% of the full payment, as determined by the specific amount. Second, partial prepayment did not affect maturity. Third, in the case of partial prepayment, the distinction lies in whether there was an application, rather than the level of the application rate. Fourth, partial prepayment exhibited lower susceptibility to market fluctuations. Fifth, making a partial prepayment affected the credit rating, borrower’s age, loan-to-value ratio (LTV), and a dummy variable representing the month. Moreover, estimating partial prepayment is easy owing to the considerable impact of the variables influencing origination and the small influence of market variables. The analysis reveals that partial prepayment has a relatively small LTV and a small DTI, increases with high credit ratings, and has minimal impact on changes in the housing market or the elapsed period. To effectively control household debt, the characteristics of partial prepayment can be utilized, such as charging early repayment fees, determining the repayment mechanism following partial prepayment, and providing policy support. This study focused on the partial prepayment of mortgage loans, an area that had not been previously researched. The findings of the full prepayment analysis were consistent with those of earlier studies; however, the analysis revealed contrasting results for partial prepayment.

Weathering the policy storm: How climate strategy volatility shapes corporate total factor productivity

Changes in climate policies have become a critical consideration for businesses, necessitating strategic adaptation and innovation in the face of evolving regulations to achieve long-term success. This study investigates the impact of climate policy uncertainty (CPU) on firm-level total factor productivity (TFP) using a dataset comprising 5954 North American listed companies from 2000 to 2019. Our findings demonstrate a significant negative relationship between CPU and firms' TFP. Particularly, firms operating in the secondary sector, with higher credit ratings, smaller Tobin's Q, and greater profitability, experience more significant negative effects from CPU. The mechanisms through which CPU operates include cost escalation, reduced turnover, and constrained investment. Employing the Local Projection Instrumental Variable (LP-IV) method, we observe that the relationship between CPU shocks and firm-level TFP is time-varying. The adverse effect of CPU on TFP is most severe in the third year following the occurrence of the shock. To mitigate the negative consequences, governments should enhance the continuity and foresight of climate policies, while firms need to effectively identify and manage climate risks to bolster their resilience in the face of uncertainty.

Corporate social responsibility and credit rating: evidence from French companies

PurposeThis study aims to provide further insights into the connection between corporate social responsibility (CSR) and companies’ credit ratings, while also exploring the role of corporate governance as a moderating factor. The hypotheses for this relationship are rooted in both legitimacy and stakeholder theories.Design/methodology/approachUsing a sample of French non-financial listed firms from 2007 to 2020, this paper uses the ordered probit model introduced by Greene (2000). The issue of endogeneity has also been addressed.FindingsThe study reveals that CSR practices positively impact companies’ credit ratings by enhancing solvency and financial performance. Specifically, firms that prioritize CSR, particularly in the social and environmental dimensions (such as community relations, diversity, employee relations, environmental performance and product characteristics), tend to have higher credit ratings and a reduced risk of default. This suggests that credit rating agencies likely incorporate CSR performance when assigning credit ratings. Furthermore, the quality of corporate governance acts as a moderator, strengthening the relationship between CSR and credit ratings. The findings remain robust even after accounting for key firm attributes and addressing potential endogeneity between CSR and credit ratings.Practical implicationsThis research provides valuable guidance for policymakers, corporate managers, investors and other stakeholders, as it offers insights into the influence of CSR activities on risk premiums and financing costs. For financial institutions, expanding credit decisions to encompass non-financial factors such as CSR can result in more accurate predictions of firm credit quality compared to relying solely on financial indicators.Originality/valueTo the best of the authors’ knowledge, this study stands out as the first to systematically examine the relationship between CSR and credit ratings within the French context. Moreover, it distinguishes itself by investigating the moderating influence of corporate governance on this relationship, setting it apart from prior research.

So Right It’s Wrong? Right Governments, Far Right Populism, and Investment Risk

Political economy literature documents how financial investors are more partial to right executives than left ones. Right cabinets face lower interest rates, less volatile stock prices and exchange rates, and higher credit ratings than left cabinets, even after accounting for fiscal differences. But does this advantage persist if right governments accommodate far right parties or ideas? I hypothesize that because far right populism can introduce political instability, markets’ evaluation of right executives might deteriorate if they enter coalition with far right parties or adopt their positions. Employing a panel analysis of bond spread data, and a comparative case study of the Netherlands and Sweden, I find that right executives enjoy significantly lower spreads than their left-wing counter-parts, but this advantage disappears if they rule in coalition with the far right or produce overly right-wing manifestos. These findings highlight that right parties may encounter tangible borrowing costs and market rebuke if they accommodate far right populism.

The transmission of targeted monetary policy to bank credit supply

In this paper I estimate the impact of Targeted Longer-Term Refinancing Operations (TLTRO) on the evolution of lending amounts and rates in Slovenia, with a specific focus on distinct effects of TLTRO-I and II. I use a combination of difference-in-differences and instrumental variable approach, which together with detail credit register data enable the identification of supply side effects of the TLTRO policy. The results show a supporting impact of targeted operations on bank loan supply, resulting in higher credit growth and lower rates. I find that the TLTRO-I was supportive through both the quantity and price channels, whereas the TLTRO-II only shows a significant impact on the credit amount. Further, I find the transmission of TLTRO-I was higher through better capitalized banks, whereas both policy waves supported lending to safe and stable firms with higher credit ratings.

Does sentiment of investor protection information disclosures affect credit risk premium? Evidence from China

As directly relevant information for bond issuance, bond prospectuses clarify the contents related to investor protection, such as protection mechanisms, debt repayment plans and safeguard measures. The sentiment of these disclosures reflects the issuer’s emphasis on risk management and the investor equity, and is an important reference information for investors to determine risk compensation. This paper selects a sample of 6,048 Chinese corporate bonds from 2006 to 2022 and explores the relationship between the sentiment of investor protection disclosure and bond credit risk premium. The findings indicate that the more negative the sentiment of investor protection related disclosures in the bond prospectus, the higher the credit risk premium for the bond. Further empirical analysis reveals the positive moderating role of credit ratings in this relationship: the positive relationship between the negative sentiment of investor protection disclosures and credit risk premiums is more significant among bonds with higher credit ratings, while it is not significant among bonds with lower ratings. The findings can inform regulatory policy makers in improving market transparency and protecting investors’ interests.

이사책임감면제도 도입이 신용등급에 미치는 영향

[Purpose] This study investigates the impact of the introduction of the director’s Liability Limitation Provision(hereafter LLP) in firms on credit ratings. Furthermore, it examines how such impacts vary depending on the ownership stake and investment horizon of the National Pension Fund. [Methodology] We conduct empirical analysis using data from companies traded on the Korea Exchange from 2012 to 2017. The key findings are as follows. [Findings] Firstly, we find that firms introducing LLP tend to have lower credit ratings compared to those that do not introduce it. Secondly, when the National Pension Fund holds a substantial ownership stake (5% or more), LLP firms tend to have higher credit ratings than those that have not. Finally, when the National Pension Fund’s investment horizon is three years or more, there is a positive relationship between the introduction of LLP and credit ratings；however, such a relationship is not significant when the investment horizon is less than three years. [Implications] These results imply that the introduction of LLP can have a negative impact on corporate governance. Furthermore, it highlights the role of shareholder activism by the National Pension Fund, in mitigating these negative impact.

Corporate Resilience in Cancel Culture Times

Corporate resilience has emerged as a prominent focus in international studies, particularly in the context of the COVID-19 pandemic that unfolded in 2019. This attention has been amplified by the structural shifts in the business models of Russian companies, prompted by imposed sanctions, thereby accentuating the need for comprehensive academic exploration of resilience, its driving forces, and adaptive turnaround strategies, especially in the era of cancel culture. Despite the heightened significance of resilience, the drivers underlying it during structural crises remain insufficiently studied. This paper addresses this gap by employing a combination of quantitative methods applied to a sample of publicly traded Russian companies spanning the years 2012 to 2022 (first half), alongside case studies. Our contribution to the literature is manifold. Firstly, our application of Altman’s Z-score model to publicly traded companies unveils the industries with the highest and lowest resilience across the Russian market from a historical perspective. Secondly, we assert that fluctuations in the degree of resilience during turbulent times, as captured by the Z-score, offer a more adequate evaluation compared to popular market-based metrics like total shareholder returns (TSR). Thirdly, our findings reveal that higher credit ratings and state ownership have no evident impact on the degree of resilience. Conversely, the professional background of CEOs is correlated with firm performance and plays a significant role in determining company resilience amid cancel culture challenges.

Politeness matters: The role of polite languages in online peer-to-peer lending

Given the limited information for assessing borrowers in online peer-to-peer (P2P) lending, the textual content of loan requests has been recognized as a crucial factor influencing lenders' lending decisions. However, whether politeness, an important but largely neglected linguistic element in loan requests, is related to lenders' decisions remains underexplored. Drawing from signaling theory, this paper seeks to answer two important questions: (1) Is the use of polite language in loan requests related to lenders' decisions? (2) If so, for which types of borrowers or loans is politeness more beneficial? We test our theoretical framework using a sample of 127,044 loan requests from Renrendai, a leading online P2P lending platform in China. Our findings reveal a significant and positive relation between the use of polite language and the likelihood of successful funding. This positive relation is stronger for borrowers with higher credit ratings, higher education levels, as well as for loan requests with lower information richness and higher certainty in language. Our findings suggest that politeness functions as a costless signal that complements costly signals, reducing information asymmetry in P2P lending. This paper bridges the gap between the literature on the role of politeness in individual decision making and information asymmetry in financial markets, providing new insights into the role of language use in P2P lending.

Equity misvaluation and debt markets

This study examines whether equity misvaluation is associated with credit risk. Credit risk can be argued as not being associated with equity misvaluation because equity misvaluation is noisy information relative to a borrower's intrinsic value. Instead, we hypothesize a nonlinear relationship between credit risk and firm misvaluation. We examine new bond issues between 1990 and 2018. Our results show that equity valuations higher than the intrinsic value are negatively associated with credit risk through higher credit ratings, lower bond yields, and a lower distance to default until analysts and creditors perceive that the firm becomes excessively overvalued. After that turning point, the association flips, and firm equity valuations become positively associated with credit risk.

Work from Home Suitability and Credit Risk Assessment

Employing firm-level work from home (WFH) suitability derived from the U.S. universe job postings, we investigate whether rating agencies and debt holders incorporate WFH suitability in their risk assessments. We document that firms with higher WFH suitability have higher credit ratings and lower costs of debt. Our results are robust to different fixed effect estimations, sampling methods, and controls. We identify two ways that WFH suitability translates into higher credit ratings: high WFH suitability is associated with lower future cash flow volatility and lower default risk. Overall, our study suggests that WFH suitability is an important determinant of credit risk assessments and that firms should see flexible work arrangements as an effective strategy in their crisis management planning.

Corporate life cycle and credit scoring

ABSTRACT This paper examines how the corporate life cycle affects credit scoring. Previous empirical studies have shown that the life cycle has an impact on financial policies, creditworthiness, risk and performance. This study utilizes panel data of U.S. listed companies for the period 1985–2017. The Dickinson model, which divides the life cycle into four stages (introduction, growth, mature, and decline), is used. The Probit model is employed to investigate this relationship. The findings show that firms in the introduction, growth, and maturity stages have a favorable and significant impact on the likelihood of a positive credit rating change (upgrade). Conversely, firms in the decline stage show a negative relationship with credit rating positive upgrades. This suggests that credit rating agencies consider a firm’s life cycle status. Therefore, firms should strive to reach the growth and mature phases in order to benefit from higher credit ratings.

A Fuzzy-Random Extension of Jamshidian’s Bond Option Pricing Model and Compatible One-Factor Term Structure Models

The primary objective of this paper is to expand Jamshidian’s bond option formula and compatible one-factor term structure models by incorporating the existence of uncertainty in the parameters governing interest-rate fluctuations. Specifically, we consider imprecision in the parameters related to the speed of reversion, equilibrium short-term interest rate, and volatility. To model this uncertainty, we utilize fuzzy numbers, which, in this context, are interpreted as epistemic fuzzy sets. The second objective of this study is to propose a methodology for estimating these parameters based on historical data. To do so, we use the possibility distribution functions capability to quantify imprecise probability distributions. Furthermore, this paper presents an application to the term structure of fixed-income bonds with the highest credit rating in the Euro area. This empirical application allows for evaluating the effectiveness of the fuzzy extension in fitting the dynamics of interest rates and assessing the suitability of the proposed extension.

Статистичний аналіз дохідності державних облігацій з використанням економетричних моделей: макроекономічні та інвестиційні аспекти

Abstract. Introduction. The yield to maturity of government bonds changes over time and depends on a number of external and internal factors. In recent years, the gap between the yield to maturity of bonds of developed countries and countries with relatively low credit ratings has been increasing. Inflation and the level of central banks key rates are important factors that cause fluctuations in the yield of government securities. The yield of government bonds is affected by the terms to maturity. Taking into account the ratio of yield and risk, the longer the maturity of government bonds, the higher the yield should be. But in practice, this dependence can be different, especially in periods of financial crises. All of the above makes relevant the task of analyzing the variation of yield to maturity of government bonds of different countries at the current stage of economic development, as well as the dependence between yield to maturity and the level of inflation on the examples of certain countries and impact on the yield to maturity of government bonds of central bank key rates. The research used such scientific methods as analysis and synthesis of results, logical-analytical methods, methods of descriptive statistics and econometric models. Purpose. The purpose of the paper are improving the approach to the analysis of the yield to maturity of government bonds of various countries and the analysis of the influence of central bank rates on the level of yield to maturity of government bonds. Results. The yield to maturity of government bonds and the rates of central banks of different countries are analyzed. The inverse relationship between the terms to maturity and the level of yield to maturity of government bonds is shown on the examples of the USA and Ukraine. For different samples, taking into account the level of the credit rating of the countries, the analysis of average yield to maturity, dispersion, standard deviation, range of variation, coefficients of oscillation and variation was performed. A high positive correlation was found between the yield to maturity of government bonds and the level of central bank rates. A regression models analysis of the influence of central bank rates on the yield to maturity of government bonds was performed. The linear regression, logarithmic regression and polynomial regression models were constructed. The most qualitative model was chosen on the basis of the coefficient of determination. Conclusions. It was found that developed countries have low (in some countries in certain periods – negative) central bank rates and a low level of yield to maturity. Countries with low credit ratings have high central bank rates and much higher yields. The examples of the USA and Ukraine show an inverse relationship between the yield to maturity and terms to maturity, which indicates the discrepancy between the level of yield and the risk of government bonds in the conditions of financial crisis. A high coefficient of variation for the entire sample of countries indicates a significant dispersion of the data. The average yield to maturity is much higher for countries with relatively low credit ratings and high yield to maturity. The standard deviation differs by more than 8 times for countries with low credit rating, and the range of variation is more than 7 times. Oscillation coefficients and coefficients of variation are also significantly higher for countries with low credit ratings and high yield. All this indicates that for countries with a high credit rating and a low yield, the variation is smaller, the population is more homogeneous, and the average value is more reliable. The linear correlation coefficient indicates a sufficiently high positive correlation between the yield to maturity of government bonds and central bank rates. The results of the regression analysis show that, of all the considered models, the influence of the central bank interest rate on the yield to maturity of government bonds with a maturity of 10 years is best described by the polynomial regression model of the third degree, which has the maximum coefficient of determination. The practical value of the methodical approach to the analysis of the yield of government bonds is that it can be used to assess the influence of various factors on the yield of bonds, as well as to analyze the dynamics of the yield indicators of certain countries' bonds.

Сучасний стан зовнішнього боргу США

In recent decades, the world economy is characterized by a constant increase in external debt of almost all countries of the world (the only exceptions are those countries to which investors and creditors have no confidence), which exacerbates the problem of world debt and the interdependence of creditor countries and debtor countries. The article is aimed at analyzing the current state of foreign debt of the United States as a country that still has an impeccable credit history and high credit ratings, and at the same time in many publications is considered as a potential threat to the whole world in case of default. During the studied period (70 years), the U.S. external debt has been constantly growing, and the trend analysis conducted in the work indicates that this growth will continue in the medium term. The U.S. foreign debt in absolute terms is the largest in the world, having almost doubled over the past 10 years. At the same time, among the countries that have the highest ratio of total public debt to GDP, the United States ranks only fifth, because the USA have the largest GDP in the world. Among the main reasons for such a significant public debt, analysts point out the world’s largest military budget, significant tax cuts in recent years and significant costs to overcome the consequences of COVID-19. Due to the high level of GDP, high credit ratings and the status of a reserve currency in the U.S. dollar, the U.S. government securities are attractive to investors. Central banks of other countries, pension, insurance and investment funds still have a sufficient level of confidence in the United States and invest financial resources in debt securities of the U.S. government. The prospects for the U.S. foreign debt depend on the ability of the Federal Reserve System (FRS) to find solutions to domestic problems, among which the most acute are rising inflation and reducing household spending. A U.S. default is considered extremely unlikely, but in case of its announcement, it would have serious consequences for the global economy, creating uncertainty not only for the U.S. economy, but also for global financial stability. A default on the U.S. external obligations would result in a downgrade of the U.S. credit rating, which would cause significant volatility in the global stock market, a drop in stock indices and an increase in the cost of borrowing, which, in turn, would significantly reduce the ability of businesses and households to obtain loans. The fall of the U.S. dollar, which will result from the announced default, will cause commodity prices, including oil, to rise, leading to higher inflation globally. There will also be problems with supply chains in international trade.

Credit ratings and social capital

We posit that credit ratings are higher for firms headquartered in high social capital regions, where managers are more likely to be trustworthy. To test this hypothesis, 9460 corporate debt ratings of US firms from 2001– 2015 was examined. We find that firms headquartered in a county with high social capital in the US have a higher credit rating. This effect is incremental and economically comparable to that of corporate social responsibility. Additional tests suggest that the impact of social capital on ratings is likely because analysts find them more credible. We conclude that credit analysts may consider the social norm around the firm's headquarters when rating firms.

Credit rating in dynamic response to the nature of firms and the business model of rating agencies: evidence from the Chinese bond market

This paper takes the A-share listed companies that issued credit bonds from 2010 to 2021 as the sample to test the probability and degree of credit rating change throughout the enterprise life cycle using the ordered logit and breakpoint regression models. Further, we study the heterogeneity of the above performance from payment models and firm natures. The results show that the credit rating inflation problem generally exists in all stages of the enterprise life cycle. The inflation is lower in the investor-pays model (state-owned enterprises), while the opposite results occur for the issuer-pays model (non-state-owned enterprises). Specifically, (1) the probability of a higher credit rating and the increased credit ratings show as an ‘inverse U’ in the enterprise life cycle. Credit rating increases if the enterprise successfully enters the growth phase, decreases if the enterprise fell into the decline phase. (2) In the investor-pays model, enterprises have a greater probability of obtaining a higher credit rating in the mature phase and a lower credit rating during the decline period. In the issuer-pays model, although the enterprise gets a smaller credit rating due to falling into the decline phase, the credit rating still has a high probability of belonging to a high credit rating. (3) State-owned enterprises have a higher probability of obtaining a high credit rating in the mature period and are more likely to have a low credit rating in the decline period. Generally, their credit rating quality is better than that of non-state-owned enterprises. In addition, in the context of the financing pressure period, the credit rating of non-state-owned enterprises decreases as they drop into the decline phase.