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Article
Publication date: 12 June 2017

Zuziwe Ntsalaze, Gideon Boako and Paul Alagidede

The purpose of this paper is to examine the impact of sovereign credit ratings on corporations in South Africa by assessing whether the sovereign rating assigned to South…

Abstract

Purpose

The purpose of this paper is to examine the impact of sovereign credit ratings on corporations in South Africa by assessing whether the sovereign rating assigned to South Africa by credit rating agencies acts as a ceiling/constraint for credit ratings assigned to corporations that operate within the country. The question of whether sovereign ratings are significant in determining corporate ratings was also explored.

Design/methodology/approach

To test the hypothesis regarding the rating of corporates relative to sovereigns, a longitudinal panel design was followed. The analysis employed fixed effects and generalized method of moments techniques.

Findings

The main findings are that sovereign ratings both act as a ceiling for corporate ratings and are important determinants of corporate ratings in South Africa. The findings however indicated that company specific variables (accounting variables) are not significant in explaining credit risk ratings assigned to corporates.

Research limitations/implications

This study only looked at the rating activity done by Standard and Poor’s (S&P). A possible further study could explore the hypothesis tested in this research using data from multiple rating agencies and contrast the results across different agencies. Future studies could also look at crisis periods and how the transfer risk discussed in this paper manifests during the transfer period.

Practical implications

The results have implications for the borrowing costs incurred by corporates in South Africa when participating in the international debt market. The implication is that if the sovereign is poorly rated, the corporates may be limited in their ability to secure investor funding at competitive rates from the international financial markets. Thus, should South Africa be downgraded to non-investment grade by S&P, the implications may be that South African corporates on average may suffer the same fate.

Originality/value

Extant literature predominantly utilizes foreign currency ratings. To the extent that this study uses local currency ratings, it adds a new dimension in the body of related studies.

Details

African Journal of Economic and Management Studies, vol. 8 no. 2
Type: Research Article
ISSN: 2040-0705

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Article
Publication date: 20 February 2008

Han Donker and Saif Zahir

This paper aims to investigate the most popular corporate governance rating systems and to scrutinize their usefulness to shareholders and the public at large. It proposes

Abstract

Purpose

This paper aims to investigate the most popular corporate governance rating systems and to scrutinize their usefulness to shareholders and the public at large. It proposes to examine whether the advertised good governance scores reflect corporate performance, fraud, lawsuits, and the like.

Design/methodology/approach

The analysis focused on the methodology used by rating agencies to rank corporate governance practices of companies. Analysis of the categories and variables used in the rating systems were also scrutinized and critiqued.

Findings

This research shows that there is a weak relationship between corporate performance and corporate governance rating. Ideas and suggestions have been proposes to remedy the shortfalls of existing rating systems.

Research limitations/implications

Many researchers use corporate governance scores in their studies to investigate the relationship between these single scores and corporate performance. Potential vulnerability and risk are demonstrated using such kind of methodologies. Research should be accomplished with the corporate governance indicators separately.

Practical implications

Several corporate governance ratings systems have been developed and implemented. These systems reduce a complex corporate governance process and related performance into a single score. Such outcome does not in any way reflect the real nature of corporate governance or its performance. Ranking, if it is at all needed, should be interpreted carefully and not be used as a simple measurement of good or bad corporate governance practice.

Originality/value

This paper is the first of its kind to critically evaluate corporate governance systems scores launched by different rating agencies.

Details

Corporate Governance: The international journal of business in society, vol. 8 no. 1
Type: Research Article
ISSN: 1472-0701

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Book part
Publication date: 9 July 2010

Akos Rona-Tas and Stefanie Hiss

Both consumer and corporate credit ratings agencies played a major role in the US subprime mortgage crisis. Equifax, Experian, and TransUnion deployed a formalized scoring…

Abstract

Both consumer and corporate credit ratings agencies played a major role in the US subprime mortgage crisis. Equifax, Experian, and TransUnion deployed a formalized scoring system to assess individuals in mortgage origination, mortgage pools then were assessed for securitization by Moody's, S&P, and Fitch relying on expert judgment aided by formal models. What can we learn about the limits of formalization from the crisis? We discuss five problems responsible for the rating failures – reactivity, endogeneity, learning, correlated outcomes, and conflict of interest – and compare the way consumer and corporate rating agencies tackled these difficulties. We conclude with some policy lessons.

Details

Markets on Trial: The Economic Sociology of the U.S. Financial Crisis: Part A
Type: Book
ISBN: 978-0-85724-205-1

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Article
Publication date: 1 February 2002

PETER RUBINSTEIN, LEO M. TILMAN and ALAN TODD

This article discusses credit migration of diversified loan pool securitizations, as evidenced by the ratings transitions of mortgage‐backed securities (MBS) and…

Abstract

This article discusses credit migration of diversified loan pool securitizations, as evidenced by the ratings transitions of mortgage‐backed securities (MBS) and asset‐backed securities (ABS). The authors contrast the ratings (i.e., credit) stability of MBS and ABS relative to ratings migration of general obligation corporate credit. They also use holding period returns to compare the total return portfolios of MBS/ABS to portfolios of senior unsecured corporate obligations.

Details

The Journal of Risk Finance, vol. 3 no. 3
Type: Research Article
ISSN: 1526-5943

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Book part
Publication date: 14 November 2012

Clea Bourne

Purpose – The purpose of this chapter is to explore the voluntary corporate governance role played by credit rating agencies, closing the ‘trust at a distance’ gap which…

Abstract

Purpose – The purpose of this chapter is to explore the voluntary corporate governance role played by credit rating agencies, closing the ‘trust at a distance’ gap which might otherwise hinder fundraising in debt capital markets.

Methodology/approach – The chapter draws on Giddens’ system trust theory and Foucauldian perspectives of knowledge/power to unpack trust production as a discursive process in financial markets. Foucauldian discourse analytic techniques are used to examine texts deployed by or about Standard & Poor's, the global credit rating agency, leading up to the 2007 credit crunch.

Findings – The texts analysed illustrate the influence of rating agencies in producing trust as well as mistrust in debt instruments.

Research limitations/implications – Rating agencies produce trust by aligning with state regulatory systems, simplifying complex debt instruments with ‘AAA’ and other well-known mnemonics, as well as offering apparent transparency and guarantees.

Practical implications – While influential, rating agencies can only produce trust by proxy. Their contribution to the actual protection of investments is minimal.

Social implications – The analysis highlights the flawed nature of trust relations in debt capital markets as rating agencies’ primary customers are the arrangers and issuers of debt rather than the investors who seek protection from risk.

Originality/value – The chapter sheds light on the deliberate nature of trust production in financial markets. Five trust/mistrust production practices are introduced – protecting, guaranteeing, aligning, making visible and simplifying. Strategic trust production is established as part of corporate governance ideology in financial markets.

Details

Corporate Social Irresponsibility: A Challenging Concept
Type: Book
ISBN: 978-1-78052-999-8

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Article
Publication date: 31 July 2018

Moataz El-Helaly, Nermeen F. Shehata and Reem El-Sherif

The purpose of this paper is to assess the association between country-level corporate governance and earnings management (EM). It aims to investigate whether the…

Abstract

Purpose

The purpose of this paper is to assess the association between country-level corporate governance and earnings management (EM). It aims to investigate whether the Governance Metrics International (GMI; acquired by Morgan Stanley Capital International in 2014) rating for national corporate governance on a country level is a significant explanatory variable for the country-level EM score or otherwise.

Design/methodology/approach

In a sample of 280 country-year observations during the period from 2000 to 2009, the paper measures national corporate governance quality using GMI ratings scores and whether the corporate governance model is Anglo Saxon or otherwise.

Findings

The findings of this study show that corporate governance is a significant indicator of lower EM levels in a country.

Practical implications

Corporate governance rating firms play a vital role in public markets. GMI provides country-level corporate governance ratings to assess the quality of corporate governance in several countries. The findings of this study show preliminary evidence that GMI ratings of corporate governance provide good guidance to investors on the quality of corporate governance in a country.

Originality/value

This paper is the first empirical attempt to examine the association between country-level corporate governance, GMI ratings for country-level corporate governance and EM.

Details

Asian Review of Accounting, vol. 26 no. 3
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 22 July 2020

Farrukh Naveed, Muhammad Kashif Khurshid and Shahnawaz Saqib

This study aims to analyze the impact of different governance characteristics on the ratings of both Islamic and conventional mutual funds.

Abstract

Purpose

This study aims to analyze the impact of different governance characteristics on the ratings of both Islamic and conventional mutual funds.

Design/methodology/approach

This study used panel data ordered probit regression model. Furthermore, to capture the mutual funds rating persistence effect and address the issue of endogeneity dynamic panel model is used and the results are estimated using the generalized method of the moment (GMM) technique.

Findings

The results indicated that amongst the corporate governance characteristics, board size, the board independence, directors and institutional ownership, and overall governance quality positively affect the ratings of both Islamic and conventional funds. However, chief executive officer (CEO) duality and board gender diversity did not show a significant impact on the ratings of these funds.

Practical implications

The current research provides input to the asset management firms as to how they can increase the fund ratings by implementing strong governance practises. Furthermore, the study also provides input to the rating agencies to account for governance characteristics along with financial indicators, when issuing the rating of any fund.

Originality/value

To the best of the author’s knowledge, this study is the first attempt to analyze the impact of corporate governance characteristics on the rating of both Islamic and conventional mutual funds and hence provides a significant contribution to the literature.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 13 no. 5
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 5 September 2017

Alexander Wiener-Fererhofer

The purpose of this paper is to analyze which key financial factors are appropriate for measuring a credit rating score for family firms. In the recent literature, there…

Abstract

Purpose

The purpose of this paper is to analyze which key financial factors are appropriate for measuring a credit rating score for family firms. In the recent literature, there exists a vast number of studies which evaluates performance differences between family and non-family firms (NFF). However an analysis with regards to a distinction between credit rating scores of family-orientated businesses compared to their counterparts in Austria has not been examined so far.

Design/methodology/approach

In order to bridge this research gap, an empirical model based on Moody’s credit rating methodology is used to address these issues. Therefore, the relevant data were taken from the 600 largest, both listed and non-listed, companies of Austria. The statistical measurements refer to a comparison of the means resulting from quantitative rating categories (profitability, leverage structure, liquidity development and firm size).

Findings

The results of this empirical research show that family firms achieve better values in profitability, leverage structure and liquidity development based on credit rating scores. Only firm size represents no significant differences between family and NFF.

Originality/value

This study will contribute to the existing literature in the academic area of family business research and offers a framework for future empirical analysis in this field. Furthermore, this paper provides important information that will help both family and NFF accomplish their financial strategies related to credit rating transitions.

Details

Journal of Family Business Management, vol. 7 no. 3
Type: Research Article
ISSN: 2043-6238

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Article
Publication date: 19 October 2015

Feng Jui Hsu and Yu-Cheng Chen

The purpose of this paper is to examine whether socially responsible firms behave differently from other firms in terms of financial risk using US-based firms from 1991 to…

Abstract

Purpose

The purpose of this paper is to examine whether socially responsible firms behave differently from other firms in terms of financial risk using US-based firms from 1991 to 2012.

Design/methodology/approach

The authors used the KLD social performance rating scores as the measure of corporate social responsibility (CSR) performance and obtained an initial sample of 38,158 firm-year observations from 1991 to 2012. The authors obtained the monthly consensus earnings forecast for fiscal year one and the monthly dispersions for these earnings forecasts from I/B/E/S, and the bond spread from DataStream database. Specifically, the authors question whether firms that exhibit CSR obtain market approval to reduce financial risk, thereby providing investors and regulators with more reliable and transparent financial information, as opposed to firms that do not meet the same criteria.

Findings

The authors find that social responsible firms usually perform better in terms of their credit ratings and have lower credit risk, in terms of loan spreads when compared to corporate bond spreads, and in terms of distance to default. The results control for various measurements for CSR and time periods, consider various CSR dimensions and components, and use alternative proxies to improve the quality of financial risk estimates.

Originality/value

The findings demonstrate the importance of considering both positive and negative CSR performance. Positive CSR ratings are associated with reduced financial risk while negative CSR performance scores lead to increased financial distress. Investors respond to positive CSR ratings.

Details

Management Decision, vol. 53 no. 9
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 20 March 2017

Florian Kiesel and Jonathan Spohnholtz

The creditworthiness of corporates is most visible in credit ratings. This paper aims to present an alternative credit rating measure independently of credit rating

Abstract

Purpose

The creditworthiness of corporates is most visible in credit ratings. This paper aims to present an alternative credit rating measure independently of credit rating agencies. The credit rating score (CRS) is based on the credit default swap (CDS) market trading.

Design/methodology/approach

A CRS is developed which is a linear function of logarithmized CDS spreads. This new CRS is the first one that is completely independent of the rating agency. The estimated ratings are compared with ratings provided by Fitch Ratings for 310 European and US non-financial corporates.

Findings

The empirical analysis shows that logarithmized CDS spreads and issuer credit ratings by agencies have a linear relationship. The new CRS provides market participants with an alternative risk assessment, which is solely based on market factors, and does not rely on credit rating analysts. The results indicate that our CRS is able to anticipate agency ratings in advance. Moreover, the analysis shows that the trading volume has only a limited influence in the anticipation of rating changes.

Originality/value

This study shows a new approach to measure the creditworthiness of firms by analyzing CDS spreads. This is highly relevant for regulation, firm monitoring and investors.

Details

The Journal of Risk Finance, vol. 18 no. 2
Type: Research Article
ISSN: 1526-5943

Keywords

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