Impact Of Credit Ratings Research Articles

The impact of credit ratings on international investment: Evidence from an emerging market

This study examines the influence of sovereign credit ratings on international investments in emerging markets, focusing on Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Using data from 22 emerging economies spanning 1999 to 2019, we employ OLS and fixed-effects regression models to analyze how credit ratings affect investment flows and market volatility. The findings indicate that sovereign credit ratings significantly impact investor decisions, as these ratings serve as a key metric in assessing investment risk and potential. This research highlights the essential role of credit ratings in enhancing financial stability and promoting economic integration through foreign investments, with implications for growth and trade. The study provides novel insights for investors, policymakers, and rating agencies on the role of credit ratings in emerging market investments, contributing to a deeper understanding of their impact on global economic dynamics.

The Impact of Credit Rating on Credit Default Swap Market: Evidence from Sovereign Downgrades

The Impact of Credit Rating on Credit Default Swap Market: Evidence from Sovereign Downgrades

The Impact of Credit Ratings on Financial Performance (ROA) and Value Creation (Tobin’s Q)

The Impact of Credit Ratings on Financial Performance (ROA) and Value Creation (Tobin’s Q)

Is this rating worth it? The benefits of credit ratings in the dynamic tradeoff model

PurposeThis study seeks to identify the main determinants of the optimal capital structure by reexamining the interpretation of the conventional set of explanatory variables used as proxies for the costs and benefits of debt in the context of the dynamic tradeoff theory.Design/methodology/approachThe authors isolate the variation in leverage due to different targets from that caused by deviations by aggregating the data across a dimension identifying firms with similar targets – credit rating category.FindingsContrary to theoretical priors, large and profitable rated firms have lower targets. The authors show that size and profitability proxy for non-financial risk and that, for rated firms, non-financial risk is positively correlated to the optimal leverage. The benefits of a better rating outweigh the costs of foregone tax shields for firms with relatively low non-financial risk. The authors find support for that theory in institutional trading – institutional investors do not punish highly rated firms when credit downgrades occur.Originality/valueThis paper contributes to the capital structure literature by developing a new approach based on data aggregation. This study is the first, to the authors’ knowledge, to find a positive effect of the firm's non-financial risk on target leverage among rated firms. The authors argue that the benefit of a better credit rating is an increasing function of the rating itself. The authors also contribute to the literature on the impact of credit ratings on the capital structure choices of the firm.

Impact of Credit Rating on the Bond Market Based on TIC Model

Although China’s bond market is expanding quickly and on a bigger scale than the stock market, it still faces a number of issues. One issue that restricts its long-term development is the relatively small scale of credit bonds. For the growth of credit bonds, it is necessary to boost the credit rating market first. In this study, it is assumed that the higher the credit rating of the bonds, the lower the issue cost will be. To prove this hypothesis, an empirical analysis has been made herein on the influence of credit ratings on the bond floatation market.

Beyond the Shades: The Impact of Credit Rating and Greenness on the Green Bond Premium

Beyond the Shades: The Impact of Credit Rating and Greenness on the Green Bond Premium

AN EMPIRICAL STUDY ON IMPACT OF CREDIT RATING ON CREDIT RISK OF BANKS: A LITERATURE REVIEW

In the financial markets, for investors, lenders, and issuers, credit rating agencies (CRAs) have a critical part in reducing the asymmetry of information between various parties. Credit ratings allow us to recognize the credit impending of a region's individuals. The paper clearly describes the role played in the establishment of a nation by credit rating agencies; there is a rise in new start-ups as all investors are rated favorably. Banks are helping to recognize the investment position of India. The main aim of the study is to analyze the research gap on the impact of credit rating on credit risk with a review of the literature. The study briefly explains the research gap which helps to analyze the factors which are responsible for credit risk. The study analyzes the definitions of basic terms, the origin of credit rating agencies’ objectives, and the scope of the present study and the literature review by assessing the credit rating users and examined the consequence of credit rating agencies on the Indian financial markets. Based on the nationwide and worldwide literature it is found that if the credit history of the investors is good then their credit score would be better and positive. It would also be incredibly convenient to collect loans. Finally, it is concluded that there is a positive impact of Credit Rating on Credit Risk of banking sectors in India.

Financing and supervisory effects of credit ratings: evidence from mergers and acquisitions

Purpose The purpose of this paper is to examine how credit ratings affect corporate financial behavior from the perspective of merger and acquisition (M&A) decisions. The goal is to test the financing and supervisory effects of credit ratings and study the economic consequences of credit ratings in the context of China. Design/methodology/approach Using a sample of Chinese A-share listed companies over the 2008–2017 period, this paper empirically examines the effect of credit ratings on firms’ M&A decisions. The authors used a probit model for regression when they tested the effect of credit rating on M&A likelihood and a tobit model when they tested the effect of credit rating on M&A intensity. Findings First, rated enterprises tend to make more acquisitions compared with non-rated enterprises, consistent with the hypothesis that credit ratings alleviate financing constraints. Second, high-rated enterprises are more cautious toward M&As due to concerns about preserving their ratings, which indicates that credit ratings also play a supervisory role in the M&A process. Additional tests show that enterprises reduce M&A activity after a rating downgrade to avoid further deterioration in their ratings; this further supports the supervisory role of credit ratings. Originality/value This paper adds incremental evidence to the literature on the impact of credit ratings on corporate financial behavior and extends the literature on the factors influencing M&As. The authors provided empirical evidence from emerging capital markets for the financing and supervisory effects of credit ratings and provided theoretical guidance for promoting the stable, long-term development of China’s credit rating industry.

The impact of credit ratings on corporate behavior: Evidence from Moody's adjustments

Moody's adjusts a firm's reported leverage across several dimensions to determine credit ratings. I find that changes to this adjustment methodology affect firm capital structure and investment decisions. In particular, in 2006, Moody's made several changes to its adjustment methodologies, which are arguably exogenous to changes in firm fundamentals. I show these changes significantly affect adjustments for firms in this year. I then show that these changes to adjustments in 2006 affect capital structure and investment decisions in 2007, especially for those firms with greatest exposure to the methodology changes. These results show that rating agencies have the power to affect corporate decisions.

The interaction of citizen’s trust between the European Commission and national politics during the crisis

Trust is considered a cornerstone in binding the society, the economy and the politics altogether. The rationale of trust takes into account the importance of both individual factors and social and institutional structures. However, since the onset of the crisis, net trust in institutions has generally declined. The literature has shown that economic and other macro-variables matter for trust in institutions along with individual characteristics. However, there is no systematic evidence on the impact of credit ratings and bailouts. Hence by employing a probit model and using the Eurobarometer survey from 2000 to 2014, this study focuses on rating episodes and bailouts while controlling for individual-level influences. Along with socio-demographic factors and economic conditions, rating episodes and bail-out plans are seen to reduce the tendency of people to trust.

The Impact of Credit Ratings on Capital Markets

We develop a model of investment financing which is characterized by the interplay of information asymmetry regarding the project's productivity and lack of commitment about the allocation of productive resources. This environment gives rise to a feedback effect between managerial actions and the creditors' beliefs about them. We find that informative credit ratings alleviate the information asymmetry between the manager of a rm and its creditors, but strengthen (on average) the incentive to withdraw productive resources from the project, and subsequently default. We characterize the conditions under which informative credit ratings worsen financing opportunities and lead to a higher expected probability of default and cost of capital. Finally, we study the implications for the regulation of credit rating agencies.

Impact of Credit Rating, Profitability and Liquidity on Capital Structure and Information Asymmetry: Evidence from Pakistani Non-Financial Sector

This study conducted for the nonfinancial sector of Pakistan, Total number of observations for the study is 600 with a group of 120. The dependent variable for this study is Capital structure and discretionary accrual, while independent variables include credit rating, profitability, and liquidity. The study developed two models for answering the research questions and objectives. Model one is about the impact of credit rating, profitability and liquidity on the capital structure, while model two is to examine the impact of credit rating and profitability on discretionary accrual. The results of the study show that credit rating and profitability positively impact capital structure and liquidity has a negative impact on capital structure. Moreover, in the second model, credit rating and profitability positively impact discretionary accrual. Another interesting finding from this study is that high rated firms more actively involved in asymmetry information. Due to this, in the financial market, investors invest in firms that increase the profitability of the firm.

CREDIT RATING AND DEBT CRISES

AbstractWe develop an equilibrium theory of credit rating in the presence of rollover risk. By influencing rational creditors, ratings affect sovereigns' probability of default, which in turn affects ratings. Our analysis reveals a pro‐cyclical impact of credit rating: In equilibrium the presence of a rating agency increases default risk when it is high and decreases default risk when it is low.

Impact of Credit Rating on Issue Market of Short-term Financing Bonds in China

Impact of Credit Rating on Issue Market of Short-term Financing Bonds in China

Credit ratings and corporate cash holdings: Evidence from Korea’s corporate reform after the 1997 Asian financial crisis

We examine the extent to which credit ratings affect firms’ cash holdings by investigating the circumstances in Korea after the 1997 Asian financial crisis. We find that, due to the costs and benefits associated with different rating levels, credit ratings are a major consideration for corporate cash management. Specifically, firms that become relatively sensitive to rating changes increase their cash holdings, either to improve the chances of an upgrade, or to avoid a downgrade. Furthermore, this effect is driven by chaebol business groups that increasingly rely on external financing that depends on credit ratings following the attenuation of their internal capital markets. Finally, we show that the impact of credit ratings on firms’ cash holdings is more noticeable when firms are more prominent in the market.

The role of credit ratings on capital structure and its speed of adjustment: an international study

ABSTRACTUsing an international dataset, we examine the role of issuers’ credit ratings in explaining corporate leverage and the speed with which firms adjust toward their optimal level of leverage. We find that, in countries with a more market-oriented financial system, the impact of credit ratings on firms’ capital structure is more significant and that firms with a poorer credit rating adjust more rapidly. Furthermore, our results show some striking differences in the speed of adjusting capital structure between firms rated as speculative and investment grade, with the former adjusting much more rapidly. As hypothesized, those differences are statistically significant only for firms based in a more market-oriented economy.

The Impact of Credit Rating on Innovation in a Two-Sector Evolutionary Model

Empirical evidence shows that innovative firms are often more constrained in obtaining external funds than less innovative firms. Explanations are based on the uncertain outcome and high costs of R&D effort. When providing credit, the lender assesses the creditworthiness of the borrower. She relies on financial data and market analysis. The financial data analysis reveals costs and the market outlook is linked to the uncertainty of future profitability. In this paper we examine whether the credit assessment behaviour of banks hurts firms of a more innovative sector more and how this affects long term innovative success and economic development. We use an evolutionary approach à la Nelson and Winter but with two sectors. A bank provides credit and supplies it to single firms based on a rating. We illuminate the impact of rating process characteristics on the long term outcome. When the bank does not distinguish for sector-specific features, such as risk and market outlook, the high-tech sector benefits over-proportionally because the surviving firms have a high profitability and further innovations are more likely. The way that the bank forms expectations about the market outlook influences the allocation of credit between sectors. The innovative sector is supplied more credit if the market outlook is assessed in a rather conservative fashion. The impact on aggregates however, is limited because the bank uses other pieces of information as well.

Capital structure and performance of Middle East and North Africa (MENA) banks: an assessment of credit rating

The firm’s credit rating is an important communication tool and previous research has shown that many companies consider it important in capital structure decisions. This study examines the determinants of capital structure in MENA banks. In addition, it investigates the determinants of credit rating. Further, the impact of credit rating and capital structure on banks’ performance is examined. Therefore, this study is an attempt to answer the following questions: 1) what are the main determinants of capital structure? 2) how does credit rating affect capital structure? 3) what are the main determinants of credit rating? and 4) what is the effect of capital structure and credit rating on bank performance? The sample covers 169 banks and is divided into two sub-samples: rated (79) and non-rated banks (90). The results indicate that credit rating directly affects the capital structure decisions as rated banks use more debts than non-rated banks. Banks’ performance is positively associated with credit rating and negatively with the capital structure. This study has an implication on investors in their decisions to invest in the banking industry. It also helpful for policy makers to understand how bank’s capital structure behaves so they could take it into consideration when issuing new regulations such as Basel

Do Rating Agencies Confirm or Surprise the Market? Market Efficiency Hypothesis vs Conspiracy Theory.

This paper examines the impact of credit ratings for sovereign bonds on bond price. We test whether credit rating agencies’ announcements surprise the market as predicted by the conspiracy theory or confirm what the market has priced already as postulated by the market efficiency hypothesis. We apply an event-parameter study to a CAPM-like model using a sample of 43 bond indexes over the period 1962-2013. The post-announcement reaction is three times larger than the pre-announcement adjustment, in particular for negative assessments. The relationship is stronger in Eurozone and intensifies since 2000. Our results are robust to different estimators, specifications, and variables definitions and weaken gradually with the increase in the event window size. This empirical evidence supports the conspiracy theory and is in line with the increasing power of credit rating agencies.

Public Disservice: the Negative Impact of Credit Ratings on US Municipal Bond Issuers

Credit rating agencies implemented a "dual ratings system" under which US municipal bond issuers are assessed more harshly that other types of issuers. This system created an artificial demand for bond insurance because the so-called monoline bond insurers were rated more leniently than the governments they insured. Using the Ambac Bond Insurance Cases, Superior Court of California Case Number CJC-08-004555, as a reference point, this paper discusses the origins of the dual ratings system and its costs to state and local government borrowers. Although the bond insurance business was a casualty of the 2007-2008 financial crisis, I find that the dual ratings system remains and that insurance is re-emerging - to the detriment of government bond issuers and their stakeholders.