Higher Credit Ratings Research Articles

Information contents of collateral under heterogeneous borrower qualities on the bank loans market in China

We analyze the risk of default and provision of collateral for bank loans made to firms of varied credit qualities using a unique dataset obtained from a major state-owned commercial bank in China. Both high and low quality borrowers provide collateral more often than medium quality debtors do. Using models that explicitly incorporate heterogeneous borrower qualities, we find a positive relation between collateralization and risk of default for loans issued to debtors with low credit ratings. In contrast, collateral provided by debtors with high credit ratings is negatively associated with the risk of default. These results suggest that low quality borrowers may be required to provide collateral at the bank's request to mitigate moral hazard problem. On the other hand, high quality borrowers may provide collateral willingly to signal quality in order to mitigate adverse selection problem when competing for getting access to bank loans. Our findings shed new lights on different information contents of collateral on the bank loans market of China, and have important implications for banks in screening, contracting and monitoring the risk of commercial loans for clients with diverse credit qualities.

Do environment, social and governance performance impact credit ratings: a study from India

PurposeThe purpose of this study is to determine the impact of environment, social and governance (ESG) disclosure on credit ratings of companies in India.Design/methodology/approachFirms under study are listed on the Bombay Stock Exchange (BSE) 500 and represent almost 93 per cent of the total market capitalization on BSE. This study considers a sample of 122 firms from a population of 500 to examine the relationship between ESG scores and Credit Rating. The scope of this study is confined to those firms listed on the S&P BSE 500 which have made ESG disclosures and were rated by various credit rating agencies like Crisil, ICRA and CARE. Data were sourced from Bloomberg. Ratings were given in ascending order. In the first model, credit rating was used as predicted variable; ESG score as predictor variable and market capitalization, net debt to equity, and total debt to asset as control considering the ordered nature of dependent variable in the study, ordered logistic regression was applied. It was repeated taking individual scores on environment rating, social rating and governance rating as predictors. The authors further segregated the 122 selected firms into large, medium and low capital firms and assessed separate logistic regression models taking credit rating as the predicted variable and overall ESG score as the predictor.FindingsIt was found that overall ESG performance and performance of individual components (environment, social and financial variables such as market capitalization, and debt to equity ratio) had significant positive indicators of creditworthiness as measured through credit rating. Governance score had a positive and insignificant relation with credit rating. Market capitalization was observed to have significant direct relationship with credit worthiness. On the other hand, number of independent directors in companies showed significant inverse relationship with creditworthiness. ESG significantly impacted credit rating in the desired direction only for small- and middle-level firms; for large firms which already had higher credit rating, ESG showed no effect. It was also found that credit rating itself determined significantly the extent of overall ESG reporting and disclosure of its components.Originality/valueThis is unique study that covers the aspects of ESG reports and its impact on credit rating.

A NEW PRICING APPROACH FOR SME LOANS ISSUED BY COMMERCIAL BANKS BASED ON CREDIT SCORE MAPPING AND ARCHIMEDEAN COPULA SIMULATION

The traditional loans pricing methods are usually based on risk measures of individual loan’s characteristics without considering the correlation between the defaults of different loans and the contribution of individual loans to the entire loan portfolio. In this study, using account-level loans data of 2010-2016 abstracted from 2 databases kindly provided by a Chinese commercial bank, the authors choose Archimedean Copula to fit the default relationship between loans, combined with the loss distribution function constructed to measure the economic capital of the loan portfolio, to propose a loan pricing method that is more suitable for measuring the unique risk characteristic of SMEs loans. Empirical evidence shows that compared with the traditional loan pricing model, this new proposed one, requiring lower loan interest rates from customers with higher credit rating, while higher loan interest rates from customers with lower credit rating, could thus be able to provide higher risk-adjusted returns, higher economic capital adequacy ratios, and ultimately stronger banks’ capabilities to tolerate risk events. Although there might still be some issues and limitations in the study, the method proposed in this study could be of interest not only to the banks’ management, but also to banking regulators as well.

Icarus of the 21st Century: The Rise and Fall of Monoline/Bond Insurers

The business model of monolines/bond insurers is to guarantee payments of debt issues in case of defaults by the issuer. Thus, effectively providing their high credit rating to lesser rated debt issuers for a fee. Monoline insurance provide protection for debt issues and secondary guarantees for certain financial products. Although sparse attention is given to monolines in academic literature, they play an important role in enabling municipalities and firms alike in refinancing through bond issues. The 2008 global financial crisis exposed monolines, dependent on an AAA-credit rating to various risks that resulted in rating downgrades which subsequently led to their demise. This study examines accounting and regulatory inadequacies that further exacerbated issues at monolines. In addition, the study conducts a quantitative and qualitative analysis of the key monoline insurers leading up to the crisis. Identify key factors that led to their fall, resulted in a key successor and outlook for the future.

A Preference for Corporate Borrowing in Alternative Markets over Borrowing from Banks under the Impact of Monetary Policies: a Lithuanian Case

An analysis of the scientific literature has revealed that companies in advanced countries have mixed capital structures, whereas companies in less advanced countries mostly depend on bank credits and loans. The reason for dependence on bank funding lies in the fact that corporate bonds are profitable only to large companies with a high credit rating, while small and medium companies—as well as large companies with lower credit ratings—find bank loans to be a more attractive method of external financing. This article focuses on the impact of particular financial and economic determinants on corporate borrowing in Lithuania. With a view to providing not only theoretical, but also practical insight in the problems of corporate financing, we have included such financial determinants as interest rates and bond yields.

Credit rating analysis based on the network of trading information

In this paper, we investigate a credit rating problem based on the network of trading information (NoTI). First, several popular tools, such as assortativity analysis, community detection and centrality measurement, are introduced for analyzing the topology structures and properties of the NoTI. Then, the correlation between the characteristics of the network and the credit ratings is investigated to illustrate the feasibility of credit risk analysis based on the NoTI. Sovereign rating based on the world trade network is analyzed as a case study. The correlation between the centrality metrics and the sovereign ratings conducted by Standard & Poor’s clearly shows that highly ranked economies with vigorous economic trading links usually have higher credit ratings. Finally, a simulation is conducted to illustrate the degree of improvement in credit rating prediction accuracy if the NoTI is considered as an additional attribute.

Feedback effects between credit ratings and financial markets

Credit rating agencies often make sharp adjustments in their pronouncements during times of stress in financial markets. These adjustments typically happen with a delay relative to shocks in market prices. Since prices convey information about what market participants are doing and thinking, it is likely that rating agencies take into account market prices when issuing their pronouncements.In order to understand the relationship between credit ratings and financial prices, we develop a model of debt roll-over in which rating agencies incorporate information publicly available in financial markets. We find that (1) rating agencies respond to market prices, i.e. nonfundamental price volatility can shift financing conditions from a low risk spread and high credit rating equilibrium to an equilibrium with high spread and low rating, and (2) rating agencies can anchor expectations about the equilibrium in financial markets, thus serving as an antidote to nonfundamental price volatility.

Do Credit Ratings Take into Account the Sustainability Performance of Companies?

In the last few decades, sustainability performance measuring has become a widely-studied issue, and various measurement proposals have been put forward. However, it is also important to know whether those measures are actually being used in the real world. In this case, we take one very important indicator used by investors when they make investment decisions: the credit rating of the potential investment. We test whether credit ratings take into account the above-mentioned measures. Following the literature, we conduct a fixed-effects ordered probit analysis, using as controls the variables usually found in the related literature on credit rating analysis. The dependent variables are S&P ratings. We find that companies with higher sustainability performance tend to have higher credit ratings, though having a less consistent performance over time seems to have no effect. To check the robustness of our results, we also perform the analysis for different sectors and sub-periods. In addition, we conduct the analysis using sustainability scores provided by ASSET4 (Datastream) as an explanatory variable and using Fitch credit ratings as the explained variable.

Može li uvođenje eura u Hrvatskoj sniziti trošak zaduživanja?

The paper analyses the impact of euro adoption on the reduction of borrowing costs of EU member states. The results of the analysis point to the existence of a "euro premium" – after controlling for the dynamics in the macroeconomic fundamentals of particular countries and the market sentiment, member states of the monetary union have, on average, lower borrowing costs and higher credit ratings than other EU member states. In order to draw attention to the significance that the results could have for bank interest rates in Croatia in the event of euro adoption, a simple VAR model is used to demonstrate that there is a statistically significant transmission of the changes in government borrowing costs to interest rates on bank loans.

Firm Credit Ratings and Financial Analyst Forecast Performance

This study examines the relationship between firms’ credit ratings and financial analyst earnings forecast performance. We hypothesize and find that high firm credit ratings, which represent low task complexity and low solvency risk, are associated with less dispersion and more accurate earnings forecasts, while low credit ratings are associated with more dispersion and less forecast accuracy. The results of this study are useful to market participants by revealing the increased (decreased) value of information contained in financial analysts’ forecasts when firms have received high (low) credit ratings. DOI: 10.15458/85451.69

The Effects of Corporate Governance on Credit Ratings: The Role of Corporate Social Responsibility

ABSTRACTThis study examines the effects of corporate governance and corporate social responsibility (CSR) on credit ratings for firms in Taiwan. We examine this causal relationship using ordered logit regressions with two-stage least-squares estimates. We document that CSR performance demonstrates both moderation and partial mediation effects in the relationship between corporate governance and credit rating. Our results indicate that a firm should practice good corporate governance and engage in CSR activities to improve its credit rating. This study further shows that family firms with strong corporate governance and good CSR performance do not benefit from higher credit ratings. However, large firms with good corporate governance practices benefit from higher credit ratings.

FINANCIAL ENGINEERING AS A TOOL FOR THE DEVELOPMENT OF CORPORATE BOND MARKET IN EASTERN EUROPE ON THE EXAMPLE OF UKRAINE

In the context of the gap between the financial and real sectors of the Ukrainian economy, there is a problem of the absence of financial instruments able to solve the issue of financing the development of the national economic system on a long-term basis. At the current stage of the stock market development, financial engineering has a significant potential for the effective application since it can become an instrument that meets the current needs of the market. The purpose of this article is to study the current dynamics of development and features of the corporate bond market in Ukraine, as well as to develop the parameters of the new profit-bonds with the help of financial engineering, which takes into account investors’ inquiries in the formation of an investment portfolio and supposed to be a profitable form of attracting financial resources for issuers. Methodology. Materials of periodicals, analytical market reviews, resources of the Internet are the informational and methodological basis of the investigation. The research is based on general scientific and special methods, such as: comparison, systematic approach factor analysis, economic and mathematical methods. A comparative analysis of the parameters of financial instruments has been carried out that allowed determining the investors’ inquiries, investment trends and features of the choice of financial instruments by investors and accordingly to offer competitive debt securities according to the parameters of payment, maturity, security, repayment order, issue of currency. The results of the study indicate that there is the necessity of reformation of the stock market in terms of expanding the range of financial instruments based on financial engineering. The introduction of profit-bonds will allow offering participants of the Ukrainian market competitive conditions for the issue of securities, which are based on the modelled parameters of bonds. A schematic algorithm for the implementation of profit bonds is developed; it joins a complex of interrelated stages of implementation, which are sensitive to internal and external factors of influence. Practical implications. Directions for improving financial instruments on the basis of financial engineering can be applied by the participants of the stock market that will increase the general level of economic activity in the national economy and permit to accumulate financial resources on the profitable terms. Value/originality. The article reveals the development of the domestic market for corporate bonds as an important segment of the stock market through the application of financial engineering and the use of new financial products created to address the issue of attracting the necessary financial resources to the real sector. The introduction of financial engineering as a tool for the development of Ukrainian corporate bond market and its schematic algorithm of the implementation will allow an investor to react in time to the market changes. The creation of the State Fund for the Guaranteeing of Income of the Investors Market Act, which is formed at the state level by analogy with the existing Guarantee Fund for Individual Deposits, will allow the fulfilment of the security parameter that will classify profit bonds as long-term debt instruments with a high credit rating.

Earthly Reward to the Religious: Religiosity and the Costs of Public and Private Debt

We document that a firm’s culture, specifically, its religiosity, affects its cost of debt. Firms in higher-religiosity counties have higher credit ratings and lower debt costs. The impact of religiosity is stronger for firms with greater information asymmetry and during recessions. Further, religiosity has additional explanatory power for the cost of bank loans (but not the cost of public bonds) beyond its impact through ratings. This supports the argument that banks have superior abilities in pricing soft information, such as corporate culture. Finally, the impact of religiosity is stronger when the lender is a small bank.

Competition, Rating Shopping and Yield Spread: Evidence from Chinese Enterprise Bond Market

Booming markets are a time of high returns and high risk, including the risk of misrepresenting the quality of an investment. The Chinese bond market has recently been going through a boom period, and we document evidence of ratings shopping in the enterprise bond market. Our evidence shows that some firms get higher credit ratings than they should, resulting in a lower cost of debt financing. We also find that investors become aware of this after multiple financing rounds and punish all clients of the ratings inflators, resulting in a lemons market in bonds for certain firms.

Director Networks and Credit Ratings

AbstractWe explore the effect of director social capital, directors with large and influential networks, on credit ratings. Using a sample of 11,172 firm‐year observations from 1999 to 2011, we find that larger board networks are associated with higher credit ratings than both firm financial data and probabilities of default predict. Near‐investment grade firms improve their forward‐looking ratings when their board is more connected. Last, we find that larger director networks are more beneficial during recessions, and times of increased financial uncertainty. Our results are robust to controls for endogeneity. Tests confirm that causality runs from connected boards to credit ratings.

Управление потенциалами: сопоставляя результаты инновационного развития России и Финляндии

The article substantiates the necessity of revision of the baseline trends for the management of potentials, comparing the results of innovative development of Russia and Finland. defining their competitive positioning. In recent years, in connection with the market presence of competition for customers, especially buyers of products of famous brands, and for innovative technology, large investment funds global companies is to establish and improve competitive positioning. Note that. the world market among the expected trends in the market positioning of crosscountry, proved to be a sharp increasing attention to information and communication technologies. According to classification of rating Agency “Moody” (“Moody’s”), Finland has the highest credit rating (AAA), which remains unchanged since 2005. The problem is the competitive positioning of countries by global priority factors deserves particular attention today.

Financial Constraints and Future Stock Price Crash Risk

This study investigates whether and how financial constraints on firms affect the risk of their stock prices crashing. We find strong evidence that financial constraints increase future stock price crash risk. This finding is robust to using a dynamic panel generalized method of moments (GMM) estimator and two quasi-natural experiments to control for potential endogeneity. Cross-sectional analyses reveal that the positive relation between financial constraints and future crash risk is more prominent for firms with high abnormal accruals or with weak corporate governance and less pronounced for firms that commit tax avoidance or have a high credit rating. Our study provides the implications of financial constraints on future extreme negative stock returns and is of interest to investors as well as other stakeholders concerned about firms’ creditworthiness and viability.

A Cross-country Study of the Effects of Institutional Ownership on Credit Ratings

A considerable number of studies have examined the relationship between corporate governance (CG) structures and corporate performance (e.g., Yermack, 1996; Gompers et al., 2003; Beiner et al., 2006; Renders et al., 2010; Ntim et al., 2012; Kumar & Zattoni 2013; Griffin, et al., 2014). In contrast, despite its importance as demonstrated by the recent financial crisis, studies examining why and how a corporation’s CG mechanisms might influence its credit ratings are rare (e.g., Switzer and Wang, 2013;Matthies, 2013; Tran, 2014). This research, therefore, seeks to contribute to the extant literature by exploring the effects of (CG) mechanisms on corporate credit ratings. Specifically, using a sample of 200 firms from 10 OECD countries over ten years covering the pre- and post-2007/08 global financial crisis period from Anglo American (i.e., Australia, Canada, Ireland, UK, and US) and Continental European (i.e., France, Germany, Italy, Japan and Spain) traditions and employing a total of 200 listed companies, this paper hopes to achieve a number of objectives. First, the paper attempted to assess the levels of compliance with, and disclosure of, CG principles contained in the 2004 OECD CG Code in firms from two different traditions: Anglo America and Continental Europe. Second, the paper sought to investigate the relationship between CG mechanisms and credit ratings. These relationships will be explored by employing firm-level CG mechanisms (ownership structures measured by Institutional Ownership) by accounting for firm-level control variables (e.g., firm size, growth, profitability, and leverage) based on a multi-theoretical framework that incorporates insights from agency and legitimacy theories. The findings revealed that there was a strong negative relationship between institutional ownership and credit ratings. From the descriptive analysis, it was shown that institutional owners did not have a very high credit rating. When the control variables were assessed, it was shown that they had a negative influence on the credit ratings with sales growth and leverage and positive significant relationship with firm size, corruption index, power distance and Anglo American countries.

Solution-Driven Finance: The New Way of 'Impact First' Why Serving Organic Lobster on Titanic Won't Do the Trick

The resounding successes in raising ever increasing amounts of capital for impact investing have never calmed the critics who maintain that much of this capital has nothing in common with an impact investing approach. These critics say that behind the figures is hidden a disguised form of return-driven investment strategies. How come the supposedly noble objectives of directing massive capital towards impact investing have not overcome the divide between the true features of impact investing and its perception in the eyes of its stakeholder community? The disconnect between, on one side, the impact investment capital raised and on the other, the impact that is needed to overcome the societal challenges we are currently facing is of concern: Whilst we are celebrating the ever-growing amount of capital going into so-called impact investing, we tend to overlook the limited impact this capital is actually having. We may very well raise an amount of USD 13 to 20 trillion USD, equivalent to what is needed to meet the SDGs. But how can we overcome the fact that most of these funds will seek risk/return profiles that can only be found in mainstream instruments targeted at some 40 countries which show political stability, functioning capital markets, high credit ratings and economic prosperity, while the bulk of challenges to be met in order to reach the SDGs lie in the 140 remaining countries, with high political end economic volatility, low safety standards, often unreliable legal systems etc. This article suggests a new form of “impact first” investing: rather than applying merely a negative screening filter that seeks to identify within a pool of random impact investment opportunities those that happen to meet a given risk/return profile, the focus needs to be on funding concrete impact solutions: Once identified, impact solutions shall be translated into financial instruments which combine the risk/return profiles of a sufficiently large spectrum of investors in order to get a given impact solution funded. DFIs, in applying their technical knowledge in funding projects in all types of sectors and their skills for developing innovative hybrid financial instruments can play a major role in this and prove their subsidiarity to the private sector. For players in the financial services industry, such new impact investing approach creates unprecedented opportunities to improve their competitiveness through the intelligence of their products. Finally, an investment approach targeted at concrete impact solutions, which are not only part of a two-dimensional investment decision but are actually placed at the very heart of the design of the financial instrument itself, would render a large portion of the debate on impact metrics redundant.

Formation of the market of high-bond (junk bonds) in the United States in 1970–1980 years

Market of high-yield bonds (also known as «junk bonds») began to emerge in the US in the mid-1970s and was associated with the activities of «junk bond king» Michael Milken from Drexel investment company. Junk bonds emitents are small and newly established companies which cannot get a high credit rating. Emission of high-yield (8–10 %) bond was their only chance to find its place in the financial market. Michael Milken realized the potential of these bonds, which, in fact, were often quite reliable securities, and started organizing their emissions by selling junk bonds to Savings and Loan Associations and other investors. In the 1980 issue of such bonds used for aggressive corporate takeovers, which supplied the capital from junk bonds market. Some of takeovers carried out in violation of laws that led to the arrest of Michael Milken, Drexel bankruptcy and the collapse of the entire junk bonds market.