A multi-country study of factors and threshold values affecting sovereign debt-taking behavior
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 13 July 2022
Issue publication date: 2 May 2023
Abstract
Purpose
This manuscript reports evidence on how debt-taking decisions of top management in a multi-country setting do affect credit rating scores assigned by credit rating agencies (CRAs) as global monitors of creditworthiness of borrowers. This aspect has been long ignored by researchers in the literature. The purpose of this paper is twofold. A test model is specified first using theories to connect debt-taking behavior to credit rating scores. Once that model helps to identify a number of statistically significant factors, the next step helps to identify threshold values at which the variables driving debt-taking behavior would worsen the credit rating scores as turning points of the thresholds.
Design/methodology/approach
The study identifies factors driving creditworthiness scores due to debt-taking behavior of countries and develops a correct research design to identify a model that explains (1) credit rating scores and the factors driving the scores and runs (2) panel-type regressions to test model fit. Having found factors driving debt-taking behavior by observed units, the next step identifies threshold values of factors at which point further debt-taking is likely to worsen credit rating risk of the observed units. This is a robustness test of the methodology used. The observed units are 20 countries with data series across 14 years.
Findings
First, new findings suggest there are about six major factors associated with debt-taking behavior and credit rating changes. Second, the model developed in this study is able to account for substantial variability while the identified factors are statistically significant within the normal p-values for acceptance of hypotheses. Finally, the threshold values of factors identified are likely to be useful for managerial decisions to judge the levels at which further debt-taking would worsen the credit rating scores of the observed units.
Research limitations/implications
The observed units are from 20 countries over 14 years of annual data available on credit rating scores (privately obtained from Standard and Poor [S&P]). The sample represents major economies but did not include emerging countries. In that regard, it will be worthwhile to explore the debt-taking behavior of emerging economies in a future study using the methodology verified in this study.
Practical implications
The findings help add few useful guidelines for top management decisions. (1) There are actually factors that are associated with debt-taking behavior, so the authors now know these factors as guides for managerial actions. (2) The authors are free to state that the credit rating changes occur on objective changes in the factors found as significantly related to the debt-taking behavior. (3) The threshold values of key factors are known, so top management could use these threshold values of named factors to monitor if a debt-taking decision is going to push the credit rating to a worse score.
Social implications
There are society-wide implications. Knowing that the world's debt level is high at US$2.2 for each gross domestic product (GDP) dollar across almost 200 countries, any knowledge on what factors help drive creditworthiness scores, thus credit riskiness, is revealed in this paper. Knowing those factors and also knowing the turning points of the factors – the threshold values – likely to worsen creditworthiness scores is a powerful tool for controlling excessive debt-taking by an observation unit included in this study (The dataset in this research can also be used to see inter-temporal movement on debt-taking in a future study).
Originality/value
In the authors' view, there are many studies on debt-taking behavior. But none has connected debt-taking on how (1) named factors are observable to management that affect credit rating changes and (2) if a factor affects creditworthiness, at which point of the factor value, the creditworthiness will flip to worsen the score. These aspects are seldom found in the literature. Hence, the paper is original with practical value at the global level.
Keywords
Acknowledgements
The first-named author acknowledges the useful comments of two examiners of the PhD thesis, 2017. A note of appreciation is recorded here for the contribution of Dr. Alireza Zarei, Coventry University, for the assistance in methodology in Pour's PhD thesis submitted to the University Putra Malaysia. The authors thank the conference discussant's comments made at the World Finance Conference in Paris in December 2018. A special note of thanks is recorded for Prof Ishaq Bhatti of Latrobe University for the comments that helped the authors to improve the manuscript. The authors acknowledge with gratitude the cash funding from the Maybank Chair Endowment, University Putra Malaysia, and two FRGS grants (Ref: FRGS/1/2019/SS08/SYUC/01/1; Ref: FRGS/1/2020/SS01/SYUC/02/3) on sovereign debt. The authors also acknowledge the help from an anonymous editor and the support staff Nikita Singh, Sivakumar who helped the authors in completing the revised manuscript as well as an anonymous reviewer of the Journal. All remaining errors are the responsibility of the authors.
Citation
Tahmoorespour, R., Ariff, M., Abdul Karim, Y.F., Lee, K.T. and Anthony, S.D. (2023), "A multi-country study of factors and threshold values affecting sovereign debt-taking behavior", International Journal of Managerial Finance, Vol. 19 No. 3, pp. 645-669. https://doi.org/10.1108/IJMF-06-2021-0291
Publisher
:Emerald Publishing Limited
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