Lower Credit Ratings Research Articles

Regional High Debt Risk and Enterprise Innovation

Local governments have a significant impact on business activities and enterprises behavior. This paper selects the data of A-share listed companies and uses panel data regression analysis model to test the mechanism of regional high debt risk inhibiting innovation. The research findings are as follows: First, the expansion of local government debt restricts enterprises' investment in innovation and research and inhibits their innovation ability by improving corporate financing constraints, reducing government subsidies and tax incentives. Excessive local debt may lead to lower credit ratings, higher interest rates, limited financing channels, and thus crowding out corporate financing. In this case, enterprises may be forced to reduce R&D-related investment. As a result, local government debt inhibits firms' ability to innovate through financing constraints..Second, the mixed ownership reform and strategic differentiation can help enterprises to reverse their disadvantages and increase innovation and R&D investment. Mixed reform can reduce the policy burden of enterprises and reduce government intervention so that enterprises can focus more on innovation activities. Strategic differentiation leads to continuous learning and improvement process, and it will stimulate the innovation vitality of enterprises and achieve the growth of innovation performance.

Asymmetric Effects of Monetary Policy on Firms

AbstractThis paper documents firm‐level evidence on the asymmetric effects of monetary policy in the United States. Focusing on the 1980q3–2019q4 period, I find that monetary tightenings show larger effects on firms' employment and sales than monetary easings. In comparison, investment rate does not generate significant asymmetry in response to sign‐dependent monetary policy shocks. I interpret these findings in the context of downward nominal wage rigidity and investment irreversibility channels. Furthermore, I exploit cross‐sectional variation and show that employment of small, nondividend payer, low credit rating, and young firms displays larger contractions in response to a monetary tightening.

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

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

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

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

Working capital balances and financial policy

A firm's working-capital account balances demonstrate substantial connections with its financial policy. Receivables and inventories are associated with lower asset volatility and higher future cash flow, and correlate with increased leverage. Conversely, payables show a positive association with shareholder return volatility and a negative correlation with future cash flow and are linked to decreased debt levels. In dynamic panel regressions estimated with system Generalized Method of Moments (GMM), a one standard-deviation increase in payables (receivables) is associated with a 0.42 (0.66) standard-deviation decrease (increase) in leverage. Furthermore, higher levels of inventories and receivables are linked with higher firm credit ratings, along with a preference for debt financing over equity issuance, while increased payables are linked with lower credit ratings and a tendency to favor equity financing over debt financing. The QuickPay regulatory shock, expediting payments and reducing receivables' volume and quality, diminished their collateral role and lowered debt sensitivity to receivables.

Political sentiment and credit ratings

This study examines the relationship between firms’ political sentiment (PSENT) and their credit ratings. Using US public firms as the sample, we reveal that PSENT is positively associated with corporate credit ratings. Furthermore, we find evidence indicating that a positive PSENT leads to higher credit ratings, while a negative PSENT results in lower credit ratings. We also demonstrate that PSENT is positively (negatively) associated with the investment grade and rating upgrade (rating downgrade). The cross-sectional analysis indicates that the positive relationship between PSENT and credit ratings is more evident among firms facing severe information asymmetry, financial distress risk, and weaker governance. Additionally, we observe that PSENT leads to higher new debt issuance. Finally, we conduct a survey of credit analysts and find evidence that corroborates our findings from empirical analyses. Overall, our study suggests that PSENT has an essential bearing on corporate credit quality.

The role of Japanese corporate governance features in explaining rating differences between global and Japanese rating agencies

Many Japanese bond issuers believe that global credit rating agencies (CRAs)—Moody's and S&P—do not consider the unique corporate governance structure in Japan and assign lower credit ratings even though the “main bank” relationship in Japan can significantly reduce the default risk of these companies. Using 5,814 rated corporate bonds issued by 558 non-financial firms in Japan from 2003 to 2021, we find that local CRAs (R&I and JCR) weigh unique Japanese corporate governance features more heavily and assign higher ratings to Japanese corporate bonds relative to global CRAs. Our results further suggest that the degree of rating differences between local and global CRAs for individual issuers results from systematically different assessments of company-specific risk by these CRAs. Our data also reveal that the importance of main bank ties in Japanese corporate governance remains intact in more recent years, contrary to previous findings.

Indirect effects of trading restrictions

Stock market trading restrictions affect prices and liquidity directly through constraints on investors' transactions and indirectly by altering the information environment. We isolate this indirect effect by analyzing how stock market restrictions affect corporate bond yields. Exploiting the staggered reductions of trading restrictions in the Chinese stock market as a quasi-natural experiment, we document that the easing of trading restrictions on a firm's stock decreases its corporate bond spreads. This effect is stronger for firms with less transparency or lower credit ratings. Our evidence suggests that the effect is likely due to improved stock price informativeness.

Climate risk and credit ratings

AbstractWe find weak evidence suggesting that cities’ credit ratings reflect their climate risk exposure. Using a large sample of US cities, we test whether cities with higher exposure to physical or transition risks of climate change have lower credit ratings. We also compare the ratings of coastal and similar noncoastal cities, and run difference‐in‐differences tests around events that raise climate change awareness. Moreover, we study the climate risk effect within cities and at the bond level. We observe a negative association only between the Hallegatte et al. (2013) sea‐level‐rise measure and ratings, and this association is solely driven by New Orleans, which had already experienced a significant climate event.

CEO extraversion and the cost of equity capital

AbstractWe examine whether CEO extraversion, an important personality trait associated with leadership, is associated with firms' expected cost of equity capital. We measure CEO extraversion using CEOs' speech patterns during the unscripted portion of conference calls. After controlling for multiple CEO and firm‐specific variables, we find a strong positive incremental association between CEO extraversion and firms' expected cost of capital. Moreover, cost of equity increases when a more extraverted CEO replaces a less extraverted CEO. In addition, we find that firms with relatively extraverted CEOs take more risk and exhibit lower credit ratings, which is associated with higher cost of equity capital. These results are statistically and economically meaningful and do not appear to be driven by reverse causality, endogenous matching, look‐ahead bias, or bias in analysts' earnings forecast.

Information processing costs and credit ratings: evidence from investor interactive platforms in China

We examine the impact on bond credit ratings of reduced information processing costs from two investor interactive platforms in China, i.e. ‘Easy Interaction’ and ‘e-Interaction’. These online platforms provide investors with a channel to directly communicate with listed companies and learn much of corporate operations. Replies and explanations from management assist investors in integrating disclosed information and reducing information processing costs. The reduced costs likely impose reputational concerns on credit rating agencies (CRAs), leading to more stringent rating standards and less rating inflation. We find that more interactions result in lower credit ratings of corporate bonds. This effect is more pronounced for bonds rated by global-partnered CRAs and bonds whose issuers have higher information complexity, and less pronounced for bonds whose issuers have official consultation websites. Further analyses show that reduced information processing costs are associated with more information contents in rating downgrades and timelier ratings. Our findings provide evidence for the disciplinary effect of reduced processing costs on CRA behavior.

Credit rating agencies during credit crunch

AbstractIn this paper, we study whether credit rating agencies (CRAs), as they claim, follow the rating through‐the‐cycle approach as opposed to a pro‐cyclical approach. In particular, we compare the behavior of CRAs during the credit crunch and normal market conditions. Using the credit rating data by S&P, we find that CRAs assign lower credit ratings to firms during credit crunch relative to normal times. Nevertheless, this result does not necessarily imply that CRAs show an excessively pro‐cyclical behavior if credit crunches have a long‐term fundamental impact on firms. Our further investigation reveals that downgrades during a credit crunch will not be reversed over the subsequent 1–5 years, which supports through‐the‐cycle credit rating.

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.

School District Borrowing and Capital Spending: The Effectiveness of State Credit Enhancement

Abstract School districts in the United States often borrow on the municipal bond market to pay for capital projects. Districts serving economically disadvantaged communities tend to receive lower credit ratings and pay higher interest rates. To remedy this problem, twenty-four states have established credit enhancement programs that promise to repay district debt when a district cannot do so, thereby enhancing the district's credit rating. With a generalized difference-in-differences approach, I rely on cross- and within-district variations to estimate the effect of state enhancement on district bond interest rate, per-pupil capital spending, and student performance. State enhancement reduces district bond interest rates by 6 percent and increases per-student capital spending by 2 percent to 7 percent. It also reduces the disparity in the interest rate and capital spending across districts serving lower- and higher-income families, with no discernible effect on test scores. I find no evidence that the amount of enhanced school debt is associated with significant changes in interest rates paid by state governments. Districts in states without such programs could have achieved cost savings in the range of $383 million to $1 billion from 2009 to 2019 had the states adopted similar programs.

Operation strategies of capital-constrained small and medium-sized enterprises based on blockchain technology

Introduction: In reality, due to the low credit rating of small and medium-sized enterprises (SMEs), it is difficult for them to obtain sufficient financing from a single financier. This paper considers a dual-channel supply chain consisting of a capital-constrained manufacturer, an e-commerce platform (ECP), a third-party logistics company (3PL) and consumers. There are two innovations in this paper: the manufacturer obtains sufficient production funds through hybrid financing of the ECP and 3PL, and consumers want to know product information and compare prices. The contributions of this paper are to investigate new applications of blockchain in both hybrid financing and meeting consumer information search needs.Methodology: We discuss the operation and pricing decisions of supply chain in two scenarios. These two scenarios are without adopting blockchain (N) and with adopting blockchain (B). Then, we compare the equilibrium decisions in two scenarios.Results: The results show that the supply chain will adopt blockchain when certain conditions are met. The initial adoption of blockchain is bad for the ECP and 3PL. Further, we find that with the increase of financing ratio, the optimal financing interest rate of the ECP decreases, while the optimal financing interest rate of the 3PL increases.Discussion: The numerical analysis shows that the adoption of blockchain can be more profitable when the cost of information search is high.Management insights: In order to achieve supply chain coordination, the manufacturer should give subsidies the ECP and 3PL.

Green Bonds for Renewable Energy in Latin America and the Caribbean

This paper comprehensively analyzes the overall status of the green bond market in Latin America and the Caribbean (LAC) for the renewable energy sector. Our results show that, in most cases, issuers are non-financial corporations. Also, despite LAC’s low perception of transparency, 78% of the volume issued has been externally reviewed. In general terms, the barriers imposed on issuance by local governments, mainly municipal debt ceiling, low credit rating and solvency, limited capabilities to prepare bankable projects, and lack of communication channels between the financial sector and local governments, constrain the green bond market in LAC. Furthermore, although the presence of development institutions that promote the issuance of green bonds in the renewable sector has improved in recent years, it is mandatory to continue making progress in this area. For that purpose, closer cooperation and alliances are essential to share responsibilities and knowledge in LAC.

Global Transmission of Fed Hikes: The Role of Policy Credibility and Balance Sheets

ABSTRACT: Contrary to historical episodes, the 2022–2023 tightening of US monetary policy has not yet triggered financial crisis in emerging markets. Why is this time different? To answer this question, we analyze the current situation through the lens of historical evidence. In emerging markets, the financial channel–based transmission of US policy historically led to more adverse outcomes compared to advanced economies, where the trade channel fails to smooth out these negative effects. When the Federal Reserve increases interest rates, global investors tend to shed risky assets in response to the tightening global financial conditions, affecting emerging markets more severely due to their lower credit ratings and higher risk profiles. This time around, the escape from emerging market assets and the increase in risk spreads have been limited. We document that the historical experience of higher risk spreads and capital outflows can be largely explained by the lack of credible monetary policies and dollar-denominated debt. The improvement in monetary policy frameworks combined with reduced levels of dollar-denominated debt have helped emerging markets weather the recent Federal Reserve hikes.

경영권방어수단과 타인자본비용

[Purpose]This study examines the effect of Anti－Takeover Provisions(ATP, hereinafter referred to as ATP) on the cost of debt capital using credit ratings and borrowing interest rates. Through this, it is intended to clarify whether creditors interpret ATP, which means weakening shareholder rights, differently from shareholders.
 [Methodology]From 2011 to 2018, domestic companies listed on the KOSPI Market excluding the financial industry were selected as samples, and ATP were identified through the articles of incorporation. We conducted a regression analysis to verify the effect of Anti－Takeover Provision on the cost of debt.
 [Findings]As a result of the analysis, companies with ATP had relatively lower credit ratings and higher borrowing interest rates than those without ATP. And the more ATP they had, the lower their credit rating was. This is consistent with overseas empirical studies that the weakening of shareholder rights is also disadvantageous to creditors, supporting that mergers and acquisitions can benefit from coinsurance effect, which reduces the risk of default by improving the company’s debt capacity after the merger.
 [Implications]This study has contributions in that it analyzed the impact of strengthening (or weakening) shareholder rights on creditors using domestic data. Research and systems related to corporate governance have been dealt with a lot from the perspective of shareholders, but there is a lack of various studies on how they affect creditors. Creditors are major stakeholders of the company and play an important role in corporate governance. In this study, it is meaningful in that the impact of changes in corporate governance on them from the perspective of creditors was analyzed through ATP.

Are credit default swaps still a sideshow? How information flow between equity and CDS markets has changed since the financial crisis

We examine the information flow between equity and credit default swap (CDS) markets using firm-level returns data before and after the global financial crisis. Before the crisis, the information flow was unidirectional, with equity returns leading CDS returns. While equity returns continue to lead CDS returns after the crisis, we find that the speed of adjustment of the CDS market to equity markets has increased during this period. We also find evidence of a bidirectional flow of information between these markets, with equity returns responding to credit protection returns in the postcrisis period. The quicker response of CDS spreads to equity returns during the postcrisis period primarily occurs among entities with lower credit ratings. In contrast, the response of equity returns to lagged CDS returns during the postcrisis period is observed among firms across different credit rating categories; however, the magnitude of the response is higher among those with lower credit ratings.

NATIONAL BRAND AS A TOOL FOR INCREASING THE GLOBAL COMPETITIVENESS OF THE COUNTRY IN THE INTERNATIONAL ENVIRONMENT

The article examines the national brand as a tool for increasing the country’s global competitiveness. The essential characteristics were studied and the category “national brand” was clarified. Its role and significance for the development of macroeconomic stability of the state are substantiated. On the global market, the national brand is one of the most important assets of any state, which helps to attract investments, tourist flows, personnel potential, improve the quality of labor resources, promote the increase in trade export-import operations, and strengthen the innovative component of the country’s development. Methodological approaches to rating assessment of national brands are considered. The dynamics of changes in the ranking of the top 10 national brands according to the Global Soft Power Index, as well as the position of Ukraine before and after full-scale military aggression, were studied. In order to determine the influence of the national brand on the level of global competitiveness of the country, the results of the rating of the Institute of Management Development (IMD) were analyzed according to four blocks of indicators: the state of the economy; government efficiency; business efficiency; the state of the infrastructure. Indicators that determine Ukraine’s low positions in international competitiveness ratings have been identified, namely: high level of corruption, low credit rating of the country, underdevelopment of the stock market, macroeconomic instability, high level of inflation, low level of health care on the quality of life of the population in general. It is substantiated that the creation of a strong national brand is a guarantee of sustainable economic development of Ukraine, which will also allow positioning the country as attractive for business, tourism and life. An increase in the rating of the country’s national brand will contribute to an increase in the inflow of direct investment, and a strong national brand significantly affects the perception of national corporate brands.