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Article
Publication date: 6 February 2024

Sourour Ben Saad, Mhamed Laouiti and Aymen Ajina

This study aims to provide further insights into the connection between corporate social responsibility (CSR) and companies’ credit ratings, while also exploring the role of…

Abstract

Purpose

This study aims to provide further insights into the connection between corporate social responsibility (CSR) and companies’ credit ratings, while also exploring the role of corporate governance as a moderating factor. The hypotheses for this relationship are rooted in both legitimacy and stakeholder theories.

Design/methodology/approach

Using a sample of French non-financial listed firms from 2007 to 2020, this paper uses the ordered probit model introduced by Greene (2000). The issue of endogeneity has also been addressed.

Findings

The study reveals that CSR practices positively impact companies’ credit ratings by enhancing solvency and financial performance. Specifically, firms that prioritize CSR, particularly in the social and environmental dimensions (such as community relations, diversity, employee relations, environmental performance and product characteristics), tend to have higher credit ratings and a reduced risk of default. This suggests that credit rating agencies likely incorporate CSR performance when assigning credit ratings. Furthermore, the quality of corporate governance acts as a moderator, strengthening the relationship between CSR and credit ratings. The findings remain robust even after accounting for key firm attributes and addressing potential endogeneity between CSR and credit ratings.

Practical implications

This research provides valuable guidance for policymakers, corporate managers, investors and other stakeholders, as it offers insights into the influence of CSR activities on risk premiums and financing costs. For financial institutions, expanding credit decisions to encompass non-financial factors such as CSR can result in more accurate predictions of firm credit quality compared to relying solely on financial indicators.

Originality/value

To the best of the authors’ knowledge, this study stands out as the first to systematically examine the relationship between CSR and credit ratings within the French context. Moreover, it distinguishes itself by investigating the moderating influence of corporate governance on this relationship, setting it apart from prior research.

Details

Review of Accounting and Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 15 November 2023

Wang Dong, Weishi Jia, Shuo Li and Yu (Tony) Zhang

The authors examine the role of CEO political ideology in the credit rating process.

Abstract

Purpose

The authors examine the role of CEO political ideology in the credit rating process.

Design/methodology/approach

This study adopts a quantitative method with panel data regressions using a sample of 5,211 observations from S&P 500 firms from 2001 to 2012.

Findings

The authors find that firms run by Republican-leaning CEOs, who tend to have conservative political ideologies, enjoy more favorable credit ratings than firms run by Democratic-leaning CEOs. In addition, the association between CEO political ideology and credit ratings is more pronounced for firms with high operating uncertainty, low capital intensity, high growth potential, weak corporate governance and low financial reporting quality. Finally, the authors find that CEO political ideology affects a firm's cost of debt incremental to credit ratings, consistent with debt investors incorporating CEO political ideology in their pricing decisions.

Research limitations/implications

Leveraging CEO political ideology, the authors document that credit rating agencies incorporate managerial conservatism in their credit rating decisions. This finding suggests that CEO political ideology serves as a meaningful signal for managerial conservatism.

Practical implications

The study suggests that credit rating agencies incorporate CEO political ideology in their credit rating process. Other capital market participants such as auditors and retail investors can also use CEO political ideology as a proxy for managerial conservatism when evaluating firms.

Social implications

The paper carries practical implications for practitioners, firm executives and regulators. The results on the association between CEO political ideology and credit ratings suggest that other financial institutions could also incorporate CEO political ideology in their evaluation in their evaluation of firms. For example, when evaluating audit risk and determining audit pricing, auditors may add CEO political ideology as a risk factor. For firms, especially those that have Democratic-leaning CEOs, the authors suggest that they could reduce the unfavorable effect of CEO political ideology on credit ratings by improving their corporate governance and financial reporting quality, as demonstrated in the cross-sectional analyses. Finally, this study shows that CEO political ideology, as measured by CEOs' political contributions, is closely related to a firm's credit ratings. This finding may inform regulators that greater transparency for CEOs' political contributions is needed as information on contributions could help capital market participants perform risk analyses for firms.

Originality/value

Credit rating agencies release their research methodologies for determining corporate credit ratings and identify managerial conservatism as an important factor that affects their risk assessments. The extant literature, however, has not empirically investigated the relation between credit ratings and managerial conservatism, which, according to behavioral consistency theory, can be proxied by CEO political ideology. This study provides novel empirical evidence that identifies CEO political ideology as an important input factor in the credit rating process.

Details

American Journal of Business, vol. 39 no. 1
Type: Research Article
ISSN: 1935-5181

Keywords

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

Keywords

Article
Publication date: 31 January 2023

Mahmoud Al Homsi, Zulkarnain Muhamad Sori and Shamsher Mohamad

This study aims to examine the determinants of Sukuk credit ratings of issuing firms in Malaysia, and the rating changes from lower to higher rating and vice versa.

Abstract

Purpose

This study aims to examine the determinants of Sukuk credit ratings of issuing firms in Malaysia, and the rating changes from lower to higher rating and vice versa.

Design/methodology/approach

A total of 328 Sukuk issuances and 1,110 Sukuk rating announcements from 2009 to 2014 were analysed using generalized ordered logit regressions approach. Firm financial characteristics, corporate governance attributes, macroeconomic factors and Sukuk structures (debt or equity based) were among the important determinants used to explain the different Sukuk credit ratings.

Findings

The results indicate a positive association of Sukuk credit rating with issuing firm’s financial information, governance attributes and the Sukuk structure whilst the macroeconomic factors did not explain the changes in the Sukuk credit rating. Specifically, firm size, profitability and leverage characteristics had significant positive effect on Sukuk credit rating for listed firms whilst only firm’s profitability had a positive effect on Sukuk credit rating by unlisted firms. With regard to governance, the board structure which includes board size, board independence and CEO/Chairman non-duality is associated with positive Sukuk credit rating for listed firms. Only financial report audited by big four auditors is associated with positive Sukuk credit rating for unlisted firms. Equity-based Sukuk are associated with positive Sukuk credit rating for listed firms while for unlisted firms only the Ijarah Sukuk had a positive Sukuk credit rating.

Research limitations/implications

Data on credit rating is scarce and had to be hand-collected from published reports. Furthermore, issues on the lack of standardisation of Islamic contracts in different geographical areas could constrain on the comparability of findings on determinants of ratings in different jurisdictions.

Practical implications

The findings provide some guide to the rating agencies to objectively assess the issuer’s creditworthiness that could mitigate default risk. Mitigating the default risk will boost investors’ confidence and credibility of credit rating agencies.

Originality/value

This study examines the determinants of Sukuk credit rating of issuing firms in Malaysia, which include not only the listed firms but also the unlisted firms.

Details

Journal of Islamic Accounting and Business Research, vol. 14 no. 8
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 28 February 2023

Karolina Krystyniak and Viktoriya Staneva

This 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…

Abstract

Purpose

This 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/approach

The 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.

Findings

Contrary 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/value

This 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.

Details

International Journal of Managerial Finance, vol. 19 no. 5
Type: Research Article
ISSN: 1743-9132

Keywords

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 that…

1270

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

Keywords

Article
Publication date: 9 November 2012

Scott J. Boylan

The purpose of this paper is to examine the potential effectiveness of government reforms aimed at improving the accuracy of ratings issued by credit ratings agencies in US…

1459

Abstract

Purpose

The purpose of this paper is to examine the potential effectiveness of government reforms aimed at improving the accuracy of ratings issued by credit ratings agencies in US financial markets.

Design/methodology/approach

The paper identifies unconscious bias as a source of inaccuracy in the credit ratings process. It examines prior behavioral research on unconscious bias, and uses this research to identify structural issues within the credit ratings industry that give rise to biased judgments. Finally, it examines whether government reforms will be effective in improving the accuracy of credit ratings, and offers additional reforms aimed at combating unconscious bias.

Findings

Recent government reforms will be most effective in curbing intentional decisions to compromise the ratings process. However, the reforms will be less effective at mitigating unconscious biases in judgments underlying credit ratings, because they do not adequately address relevant structural issues. To combat unconscious bias, changes need to be made to ratings agencies' fee structures, business models, and risk management functions.

Practical implications

The analysis is of use to regulators who are contemplating the need for reforms aimed at improving the accuracy of credit ratings. While focusing on events in the USA, the analysis is relevant to any country in which credit ratings are influential in financial markets.

Originality/value

This is the first paper to examine the performance of credit ratings agencies through the lens of behavioral psychology, and to introduce the concept of unconscious bias as a determining factor in the accuracy of credit ratings.

Details

Journal of Financial Regulation and Compliance, vol. 20 no. 4
Type: Research Article
ISSN: 1358-1988

Keywords

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 business…

1292

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

Keywords

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 agencies. The…

1535

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

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).

1131

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

Keywords

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