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Book part
Publication date: 21 August 2019

Yu-Jen Hsiao, Lei Qin and Yueh-Lung Lin

This chapter differentiates the effect of solicited credit ratings (SCRs) and unsolicited credit ratings (UCRs) on bank leverage decision before and after the credit rating

Abstract

This chapter differentiates the effect of solicited credit ratings (SCRs) and unsolicited credit ratings (UCRs) on bank leverage decision before and after the credit rating change. We find that banks with UCRs issue less debt relative to equity when the credit rating changes are approaching. Such findings are also prominent when bank credit rating moves from investment grade to speculative grade. After credit rating upgrades (downgrades), banks with unsolicited (solicited) credit ratings are inclined to issue more (less) debt relative to equity than those with solicited (unsolicited) credit ratings. We conclude that SCR and UCR changes lead to significantly different effects on bank leverage decision.

Details

Advances in Pacific Basin Business, Economics and Finance
Type: Book
ISBN: 978-1-78973-285-6

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Article
Publication date: 16 August 2021

Qian Xu, Yuhui Wu and Lingling Zhai

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…

Abstract

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.

Details

Nankai Business Review International, vol. 12 no. 4
Type: Research Article
ISSN: 2040-8749

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Article
Publication date: 5 February 2021

Puneet Koul, Piyush Verma and Lalit Arora

The study analyzes significant parameters defining the credit worthiness, economic viability and managerial efficiency of special purpose vehicles (SPVs) of infrastructure…

Abstract

Purpose

The study analyzes significant parameters defining the credit worthiness, economic viability and managerial efficiency of special purpose vehicles (SPVs) of infrastructure development firms engaged in the execution of road projects under PPP model in India.

Design/methodology/approach

The study is based on a comprehensive review of credit rating reports of major rating agencies. In particular, 18 special purpose vehicles (13 BOT-toll–based and 5 BOT-annuity–based road projects) during the period 2010–2019 were considered to conduct a comparative analysis of their rating progression. Considering both financial as well as nonfinancial parameters, their segregation was done on the basis of strengths, constraints and key rating sensitivities influencing the ratings of SPVs involved in road projects under PPP model.

Findings

Promoters' credibility emerged as an important factor affecting PPP credit ratings. Other prominent factors included nature of stretch and regulatory terms and conditions and the project's potential to generate cash flows. Inability of PPP projects to generate the projected levels of toll collections was a major constraint and hampered ratings over time. Growth in traffic was a key sensitive area in a toll-based project. Interestingly, despite the fixed nature of revenues, BOT (annuity) projects were impacted by rating changes.

Research limitations/implications

Fewer sample projects (for which the data were available) was a constraint. Future research could consider larger data sets to provide deeper insights. An examination of credit rating parameters using rating reports of projects in other developing nations could provide meaningful implications. The findings of this research however cannot be undermined as the study bridges a gap in existing literature pertaining to the examination of PPP model from a credit rating perspective.

Practical implications

This study would guide project developers, government agencies and awarding agencies of PPP road projects to anticipate the challenges and take adequate steps to mitigate them.

Originality/value

Research in the area of PPP projects is skewed toward risk assessment with respect to financial parameters. The present study emphasizes the rating framework of SPVs. Comprehensive examination of factors affecting project ratings in the form of projects' strengths, constraints and sensitivities would provide inputs to academics and researchers.

Details

Built Environment Project and Asset Management, vol. 11 no. 2
Type: Research Article
ISSN: 2044-124X

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Article
Publication date: 21 March 2016

Michael Jacobs Jr, Ahmet K. Karagozoglu and Dina Naples Layish

This research aims to model the relationship between the credit risk signals in the credit default swap (CDS) market and agency credit ratings, and determines the factors…

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Abstract

Purpose

This research aims to model the relationship between the credit risk signals in the credit default swap (CDS) market and agency credit ratings, and determines the factors that help explain the variation in such signals.

Design/methodology/approach

A comprehensive analysis of the differences in the relative credit risk assessments of CDS-based risk signals and agency ratings is provided. It is shown that the divergence between credit risk signals in the CDS market and agency ratings is explained by factors which the rating agencies may consider differently than credit market participants.

Findings

The results suggest that agency credit ratings of relative riskiness of a reference entity do not always correspond with assessments by CDS spreads, as the price of risk is a function of additional macro and micro factors that can be explained using statistical analysis.

Originality/value

This research is unique in modeling the relationship between the credit risk assessments of the CDS market and the agency ratings, which to the best of the authors' knowledge has not been analyzed before in terms of their agreement and the level of discrepancy between them. This model can be used by investors in debt instruments that are not explicitly CDSs or which have illiquid CDS contracts, to replicate market-based, point-in-time credit risk signals. Based on both market-based and firm-specific factors in this model, the results can be used to augment through-the-cycle credit risk assessments, analyze issues surrounding the pricing of CDSs and examine the policies of credit rating agencies.

Details

The Journal of Risk Finance, vol. 17 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 7 January 2014

Graeme Baber

The purpose of this paper is to investigate the role and responsibility of credit rating agencies in promoting soundness and integrity, especially in the course of their…

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Abstract

Purpose

The purpose of this paper is to investigate the role and responsibility of credit rating agencies in promoting soundness and integrity, especially in the course of their business activities.

Design/methodology/approach

The paper describes, and uses, the framework for the activities of credit rating agencies introduced by the International Organization of Securities Commissions (IOSCO), in order to give effect to this investigation.

Findings

Credit rating agencies have implemented the provisions of the Code of Conduct Fundamentals for Credit Rating Agencies of the IOSCO on the quality and integrity of the rating process, to the extent of the resources available to them.

Research limitations/implications

The main source of data is the information collected by the IOSCO from nine credit rating agencies, including the main three, on the quality and integrity of their rating processes. The absence of triangulation of research methods limits the robustness of the findings.

Originality/value

The paper addresses a specific aspect of the credit ratings story since the financial crisis on which there is currently little in the literature. It also focuses upon the actions of credit rating agencies, rather than on how these organisations are, or should be, regulated.

Details

Journal of Money Laundering Control, vol. 17 no. 1
Type: Research Article
ISSN: 1368-5201

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Article
Publication date: 20 February 2017

Yiming Hu, Ying Yang and Pengfei Han

The purpose of this paper is to examine the difference of credit enhancement of variously secured bonds issued by local government financing platform bond (LGFPB).

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Abstract

Purpose

The purpose of this paper is to examine the difference of credit enhancement of variously secured bonds issued by local government financing platform bond (LGFPB).

Design/methodology/approach

The approaches to secure the bonds usually include mortgage, collateral, guarantee, etc.

Findings

Using a sample of LGFPBs issued during the 2007-2013 period, the authors find that all of the approaches to secure the bonds would increase the bond rating and that compounded approaches have a higher credit enhancement effect than single approaches. Among these approaches, the requirement of collateral has the strongest enhancement effect. Moreover, the authors find that the guarantee provided by a state-owned bank or enterprise increases the bond rating more than the guarantee provided by other local government financing platforms.

Research limitations/implications

The findings in this study suggest that the credit enhancement would be deeply affected by the approach used to secure the bond.

Practical implications

These results can help the local government make better decisions when issuing bond.

Originality/value

This study empirically analyzes the different credit enhancement approaches for securing LGPFBs for the first time and contributes to the literature regarding credit ratings of local government bonds.

Details

China Finance Review International, vol. 7 no. 1
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 5 May 2004

Jill M. Phillips and Ani L. Katchova

This study examines credit score migration rates of farm businesses, testing whether migration probabilities differ across business cycles. Results suggest that…

1409

Abstract

This study examines credit score migration rates of farm businesses, testing whether migration probabilities differ across business cycles. Results suggest that agricultural credit ratings are more likely to improve during expansions and deteriorate during recessions. The analysis also tests whether agricultural credit ratings depend on the previous period migration trends. The findings show that credit score ratings exhibit trend reversal where upgrades (downgrades) are more likely to be followed by downgrades (upgrades).

Details

Agricultural Finance Review, vol. 64 no. 1
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 1 March 2003

Kreag Danvers

This study examines rating agency explanations that accompany changes in credit ratings for nonprofit hospitals. A national sample of Standard & Poor’s revision…

Abstract

This study examines rating agency explanations that accompany changes in credit ratings for nonprofit hospitals. A national sample of Standard & Poor’s revision announcements is used to identify hospital characteristics that purportedly motivate credit rating changes. Significant differences in agency-cited performance dimensions, such as profitability, liquidity, service-mix, capital structure and market share, are observed across upward and downward revisions. The relative usefulness of these citations for explaining and classifying credit changes is also evaluated. The results suggest that agency explanations provide limited value relative to conventional, multivariate information sets.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 15 no. 2
Type: Research Article
ISSN: 1096-3367

Article
Publication date: 31 July 2018

Shanli Yu, Guotai Chi and Xin Jiang

The purpose of this paper is to propose a system with the highest discriminatory power by selecting an indicator system based on the K–S test according to the unique…

Abstract

Purpose

The purpose of this paper is to propose a system with the highest discriminatory power by selecting an indicator system based on the K–S test according to the unique circumstances of small enterprises.

Design/methodology/approach

The proposed method relies on calculating the K–S test statistical magnitude of D iteratively to reach a system with the maximum discriminatory power.

Findings

The empirical results, demonstrated using 3,045 small businesses from a Chinese bank, show that credit rating system should focus on the indicator system’s discriminatory power rather than a single indicator’s discriminatory power, because the interaction between indicators affects the discriminatory power of the system.

Practical implications

The proposed method creates a credit rating system with the highest discriminatory power, rather than its indicators, which is a more reasonable and novel approach to credit rating.

Originality/value

The approach is unique because the final system will have high discriminatory power and has excellent potential for decision support. The authors believe that this contribution is theoretically and practically relevant because credit rating for small business is especially difficult and complicated.

Details

Management Decision, vol. 57 no. 1
Type: Research Article
ISSN: 0025-1747

Keywords

Open Access
Article
Publication date: 24 July 2019

Bora Aktan, Şaban Çelik, Yomna Abdulla and Naser Alshakhoori

The purpose of this paper is to empirically investigate the effect of real credit ratings change on capital structure decisions.

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Abstract

Purpose

The purpose of this paper is to empirically investigate the effect of real credit ratings change on capital structure decisions.

Design/methodology/approach

The study uses three models to examine the impact of credit rating on capital structure decisions within the framework of credit rating-capital structure hypotheses (broad rating, notch rating and investment or speculative grade). These hypotheses are tested by multiple linear regression models.

Findings

The results demonstrate that firms issue less net debt relative to equity post a change in the broad credit ratings level (e.g. a change from A- to BBB+). The findings also show that firms are less concerned by notch ratings change as long the firms remain the same broad credit rating level. Moreover, the paper indicates that firms issue less net debt relative to equity after an upgrade to investment grade.

Research limitations/implications

The study covers the periods of 2009 to 2016; therefore, the research result may be affected by the period specific events such as the European debt crisis. Moreover, studying listed non-financial firms only in the Tadawul Stock Exchange has resulted in small sample which may not be adequate enough to reach concrete generalization. Despite the close proximity between the GCC countries, there could be jurisdictional difference due to country specific regulations, policies or financial development. Therefore, it will be interesting to conduct a cross country study on the GCC to see if the conclusions can be generalized to the region.

Originality/value

The paper contributes to the literature by testing previous researches on new context (Kingdom of Saudi Arabia, KSA) which lack sophisticated comparable studies to the one conducted on other regions of the world. The results highlight the importance of credit ratings for the decision makers who are required to make essential decisions in areas such as financing, structuring or operating firms and regulating markets. To the best of the authors’ knowledge, this is the first study of its kind that has been applied on the GCC region.

Details

ISRA International Journal of Islamic Finance, vol. 11 no. 2
Type: Research Article
ISSN: 0128-1976

Keywords

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