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1 – 10 of over 7000The authors examine the effect of split environmental, social and governance (ESG) ratings on information asymmetry, corporate value and trading behavior. The authors test the…
Abstract
The authors examine the effect of split environmental, social and governance (ESG) ratings on information asymmetry, corporate value and trading behavior. The authors test the risk-based hypothesis and the optimism-bias hypothesis on the relationship between diverging opinions and future stock prices. The authors results show that split ESG ratings is positively related to idiosyncratic volatility, an alternative measure for information asymmetry. Further, the negative effect of split ESG ratings on cumulative abnormal return under short-selling constraints is consistent with the optimism bias hypothesis. The authors find a negative relationship between split ESG ratings and the net purchase ratio (NPR) of pension funds. Considering that the NPR is a direct measure of net demand, ESG disagreement may hinder socially responsible investing (SRI) in a firm. This study directly demonstrates the negative effect of ESG disagreement on firm value and investment by Korea's National Pension Service (NPS). The results offer valuable insights into policymakers, as the wide divergence in ESG ratings requires urgent attention to expand SRI.
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Yun Yeong Jung and Rae Soo Park
This paper investigates the effects of information asymmetry and Credit Rating Agency's reputation on bond yield spread, which is caused by the split bond rating of CRAs. For…
Abstract
This paper investigates the effects of information asymmetry and Credit Rating Agency's reputation on bond yield spread, which is caused by the split bond rating of CRAs. For analysis, We do multivariate analysis, using bond rating and bond yield spread data in Korea from 2004 to 2015. The empirical results are as follows.
First, we examines whether information asymmetry affects the bond yield spread. using split rating data. As a result, the information asymmetry measured by split rating variable is significant, which supports the information asymmetry hypothesis. Additionally we can find bond yield spread is decided by negative credit grade rather than positive credit grade under split rating condition.
Next, we examines the relationship between the CRA’s reputation and the bond yield spread in case of split rating. Here, samples were divided into full samples and split rating samples. Summarizing the result, both samples are suggest similar result, the bond yield spread is changed depending on the specific CRA’s grading which having conservative rating tendency.
Thus, This result suggest information asymmetry caused by split rating and CRA’s reputation measured by CRA’s rating tendency affect bond yield spread in Korea
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Earl D. Benson and Barry R. Marks
In April and May of 2010 Moody's recalibrated its municipal bond ratings to a global scale, the system they use for other asset classes and the same scale used by Standard and…
Abstract
Purpose
In April and May of 2010 Moody's recalibrated its municipal bond ratings to a global scale, the system they use for other asset classes and the same scale used by Standard and Poor's (S&P). The authors investigate the impact of Moody's recalibration on true interest cost (TIC) of competitively-sold, uninsured, new bond issues with split bond ratings, by looking at a sample of bond issues before recalibration (1997–2010) and after recalibration (2010–2017).
Design/methodology/approach
Two different hypotheses are tested for each period to estimate whether TIC remains the same when the S&P rating is higher (H1) than Moody's rating or lower (H2) compared to bond issues for which the S&P and Moody's rating are the same. Further, two additional hypotheses are tested. H3 tests whether the impact of having a higher rating from S&P is the same as having a lower rating from S&P. H4 tests whether the impact of having a split rating is the same in the pre- and post-recalibration period.
Findings
Tests suggest that before recalibration a higher S&P rating leads to significantly lower interest costs, but a lower S&P rating does not lead to significantly higher costs. After recalibration, a higher S&P rating leads to significantly lower interest costs; however, a lower S&P rating leads to significantly higher interest costs for the bonds in the sample. The findings also suggest that the rating systems of Moody's and S&P became more similar to each other after recalibration and that the impact on interest cost of a higher S&P rating is reduced after the recalibration.
Originality/value
It appears that a given Moody's rating (which used higher credit standards in the period before recalibration) was more influential than the S&P rating prior to recalibration because investors “ignored” a lower S&P rating during this period. After recalibration, the lower S&P rating was no longer ignored by investors. Therefore, Moody's recalibration seems to have had the intended effect of moving the credit standards of the two rating agencies more into parity. This provides value to investors since they may now assume, unlike the situation in the pre-recalibration period, that similar ratings from the two companies provide similar information about the probability of default and loss that would occur following a default. From the standpoint of regulators, the municipal credit information is easier to understand and is more transparent for investors.
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Marc Simpson and Axel Grossmann
To determine the effect that covenants have on the credit ratings assigned by the two major agencies.
Abstract
Purpose
To determine the effect that covenants have on the credit ratings assigned by the two major agencies.
Design/methodology/approach
The authors examine 1,822 bond issues from 1991 to 2018, with a two-stage methodology to account for the endogeneity of the firms' choices and the ordinal nature of the ratings. The authors use Hendry's model selection method to find the best-fitting models from 37 control variables; the final models feature 20–24 orthogonalized variables, all significant at 5% and most at 1%.
Findings
The study’s results suggest that restrictive covenants positively affect ratings, particularly for bonds on the border of junk and investment grade. However, this effect appears to be decreasing with time, suggesting the financial crisis of 2008 has impacted ratings. Additionally, divergent covenant treatment leads to split ratings where the two agencies assign different levels of ratings on the same bonds. The study’s findings provide key insights into the factors that differentiate ratings given by each agency.
Practical implications
Managers must balance the perceived benefits of covenants against the costs, included lower credit ratings.
Originality/value
No other study has examined this issue controlling for both the ordinal nature of the ratings and the endogeneity in the decision to include specific covenants.
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Kevin T. Rich, Brent L. Roberts and Jean X. Zhang
As the management discussion and analysis (MD&A) section contains discretionary narrative disclosures regarding a government's yearly financial changes and status, the authors…
Abstract
Purpose
As the management discussion and analysis (MD&A) section contains discretionary narrative disclosures regarding a government's yearly financial changes and status, the authors investigate several municipal debt market consequences of linguistic tone within these disclosures.
Design/methodology/approach
The authors textually analyze municipal MD&As with Linguistic Inquiry and Word Count (LIWC) software and develop narrative tone measures based on existing financial-specific dictionaries. Using a final sample of 446 municipal bond issuances from 2012 to 2016, the authors modify the current bond regression models to examine the association between MD&A disclosure tone and future bond interest costs or rating disagreements.
Findings
This study’s empirical analysis suggests that more negative MD&A tone is associated with higher future debt costs and greater future disagreements among bond rating agencies.
Practical implications
Overall, the evidence implies that municipal bond stakeholders use the information in narrative disclosures when evaluating risk, but that the qualitative nature can introduce differences in interpretation between users. Furthermore, additional training in MD&A writing and further standard guidance in MD&A disclosures could improve the MD&A's informativeness for bond market decision-making and state-level monitoring.
Originality/value
This study is first to incorporate narrative tone measures into bond models in a governmental context.
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Kerstin Lopatta, Magdalena Tchikov and Finn Marten Körner
A credit rating, as a single indicator on one consistent scale, is designed as an objective and comparable measure within a credit rating agency (CRA). While research focuses…
Abstract
Purpose
A credit rating, as a single indicator on one consistent scale, is designed as an objective and comparable measure within a credit rating agency (CRA). While research focuses mainly on the comparability of ratings between agencies, this paper additionally questions empirically how CRAs meet their promise of providing a consistent assessment of credit risk for issuers within and between market segments of the same agency.
Design/methodology/approach
Exhaustive and robust regression analyses are run to assess the impact of market sectors and rating agencies on credit ratings. The examinations consider the rating level, as well as rating downgrades as a further measure of empirical credit risk. Data stems from a large global sample of Bloomberg ratings from 11 market sectors for the period 2010-2018.
Findings
The analyses show differing effects of sectors and agencies on issuer ratings and downgrade probabilities. Empirical results on credit ratings and rating downgrades can then be attributed to investment grade and non-investment grade ratings.
Originality/value
The paper contributes to current finance research and practice by examining the credit rating differences between sectors and agencies and providing assistance to investors and other stakeholders, as well as researchers, how issuers’ sector and rating agency affiliations act as relative metrics.
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The purpose of this paper is to investigate whether the bond market disciplines all banks equally, in the sense of demanding the same relative risk premium across banks of…
Abstract
Purpose
The purpose of this paper is to investigate whether the bond market disciplines all banks equally, in the sense of demanding the same relative risk premium across banks of different risk over the business cycle.
Design/methodology/approach
To test this hypothesis, the paper compares the difference between the credit spreads in the primary market of bank and firm bonds with the same credit rating issued during expansions with that same difference of spreads for bonds issued during recessions.
Findings
The paper finds that during recessions investors demand higher risk premiums. Importantly, the paper finds that the impact of recessions is not uniform across banks – it affects riskier banks more than safer ones. In other words, in recessions investors are relatively more demanding on riskier banks than on safer ones.
Originality/value
These findings are novel. They also have important policy implications because they show that a bond‐issuance policy aimed at promoting market discipline could affect the relative funding costs of banks over the business cycle. They also indicate that the information which can be extracted from the credit spreads on bank bonds varies across banks for reasons unrelated to their risk.
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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…
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.
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The purpose of this study is to investigate the effects of two instructional design formats on learning outcomes in introductory accounting.
Abstract
Purpose
The purpose of this study is to investigate the effects of two instructional design formats on learning outcomes in introductory accounting.
Design/methodology/approach
This study describes split-source instructional designs and uses an experiment administered to two groups of students enrolled in an undergraduate introductory accounting subject. The performance scores in recall and transfer test items are used to evaluate students’ learning outcomes.
Findings
The study suggests that instructors can enhance students understanding of introductory accounting by integrating text and diagrams in introductory accounting.
Practical implications
University instructors require evidence of teaching and learning activities that enhance student learning during the study of introductory accounting. This study shows that a redesign of accounting instructional material improves students’ performance and learning experience.
Originality/value
This study addresses a gap in the literature by examining the use of integrated instructional materials as an alternative to the separate diagram and text when learning accounting. The study also explores the effect of reorganising learning material on students load by analysing the mental effort reported by students. Finally, the study contributes useful findings on reorganising accounting instructional material aimed at enhancing the understanding of introductory accounting.
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The purpose of this paper is to split loan customers to different credit ratings to ensure the results that show that customers with lower credit ratings have higher loss rates…
Abstract
Purpose
The purpose of this paper is to split loan customers to different credit ratings to ensure the results that show that customers with lower credit ratings have higher loss rates, and the number of customers that satisfies the bell-shaped distribution. Hence, the number of credit ratings, the distribution of the rated obligors among ratings can achieve a meaningful differentiation of risk, which can avoid the loan pricing confusion.
Design/methodology/approach
The authors introduce a multi-objective programming to establish the credit rating model. Objective function 1 minimizes the absolute difference between the obligor number proportion and perfect client proportion, following a standard normal distribution. Objective function 2 minimizes the total difference of the deviation between two adjacent credit ratings’ loss rates. This study combines the two objective functions to ensure the obligor number distribution and the monotonicity of the loss rate, and applies genetic algorithm to solve the model.
Findings
This study’s analysis is based on data from 6,155 enterprises, provided by a Chinese bank and Prosper P2P loan data. The empirical results reveal that the proposed approach can ensure the balance between both criteria and avoid undue concentration of obligors in particular grades.
Originality/value
The proposed credit model could help building a reasonable credit rating system, which is the prerequisite of loan pricing; thus, inaccurate credit rating can cause incorrect loss rate estimates and loan pricing.
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