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1 – 10 of 54Yu-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.
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Philipp Gmehling and Pierfrancesco La Mura
This paper aims to provide a theoretical explanation of why credit rating agencies typically disclose credit risk of issuers in classes rather than publishing the qualitative…
Abstract
Purpose
This paper aims to provide a theoretical explanation of why credit rating agencies typically disclose credit risk of issuers in classes rather than publishing the qualitative ranking those classes are based upon. Thus, its goal is to develop a better understanding of what determines the number and size of rating classes.
Design/methodology/approach
Investors expect ratings to be sufficiently accurate in estimating credit risk. In a theoretical model framework, it is therefore assumed that credit rating agencies, which observe credit risk with limited accuracy, are careful in not misclassifying an issuer with a lower credit quality to a higher rating class. This situation is analyzed as a Bayesian inference setting for the credit rating agencies.
Findings
A disclosure in intervals, typically used by credit rating agencies results from their objective of keeping misclassification errors sufficiently low in conjunction with the limited accuracy with which they observe credit risk. The number and size of the rating intervals depend in the model on how much accuracy the credit rating agencies can supply.
Originality/value
The paper uses Bayesian hypothesis testing to illustrate the link between limited accuracy of a credit rating agency and its disclosure of issuers’ credit risk in intervals. The findings that accuracy and the objective of avoiding misclassification determine the rating scale in this theoretical setting can lead to a better understanding of what influences the interval disclosure of major rating agencies observed in practice.
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The author, a technical officer at the Association of Corporate Treasurers, describes the growth in the power of the rating agencies and explains the background and content of the…
Abstract
The author, a technical officer at the Association of Corporate Treasurers, describes the growth in the power of the rating agencies and explains the background and content of the new code which has been proposed to cover their activities in both the UK and the US.
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Finn Marten Körner and Hans-Michael Trautwein
The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for…
Abstract
Purpose
The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for sovereign risks. It is frequently argued that CRAs have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU), underestimating sovereign risk in the early years and over-rating the lack of national monetary sovereignty since the onset of the Eurozone debt crisis. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union.
Design/methodology/approach
While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. This paper examines the major CRAs’ methodologies for rating sovereign debt and test their sovereign credit ratings for a monetary union bonus in good times and a malus, akin to the “original sin” problem of emerging market countries, in bad times.
Findings
Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, the panel regression estimation results find strong evidence that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis and a large penalty after 2010.
Practical implications
The crisis has brought to light that EMU countries’ euro-denominated debt may not be considered as local currency debt from a rating perspective after all.
Originality/value
In addition to quantifying the local currency bonus and malus, this paper shows the fundamental problem of rating sovereign debt of monetary union members and provide approaches to estimating it over time.
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This paper attempts to identify the areas for further research related to regulating credit‐rating agencies (CRAs), in order to assess whether the prerequisite for a “complete…
Abstract
Purpose
This paper attempts to identify the areas for further research related to regulating credit‐rating agencies (CRAs), in order to assess whether the prerequisite for a “complete change” is present so to achieve a genuine paradigm shift on the matter.
Design/methodology/approach
An overview of the unregulated background of CRAs is presented followed by the European Union's and USA's regulatory initiatives together with a critical assessment of the former and an identification of the substantive areas for further thinking.
Findings
The adequacy of the recent CRAs regulation is questioned in the light of the need to take account of crucial elements such as scope, use of methodologies, due diligence and the regulatory reliance on ratings. A definition of competition is also warranted as well as a questioning of the “issuer pays” model and an assessment of the impact of ratings on systemic risk. An alternative regulatory response could take a more general view of regulating the credit‐rating activity as a whole and on a world wide scale.
Originality/value
This paper identifies areas for further research needed for an assessment of the most suitable regulation for the credit‐rating activity. Also, the paper focuses on the need to better understand the complicated nature, functioning and impact of CRAs in the financial system in order to map the different challenges for regulators, politicians, practitioners and academics.
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Alastair Adair and Norman Hutchison
Aims to examine financial risk management. The UK valuation profession has been criticised for inconsistencies and failures to reflect risk and uncertainty in certain valuation…
Abstract
Purpose
Aims to examine financial risk management. The UK valuation profession has been criticised for inconsistencies and failures to reflect risk and uncertainty in certain valuation assignments such as the pricing of urban regeneration land. Also the Investment Property Forum/Investment Property Databank specifically concluded that a new approach is needed which combines conventional analysis of returns uncertainty with a more comprehensive survey of business risks. This debate has been brought into sharper focus by the publication of the Carsberg Report, which emphasised the need for more acceptable methods of expressing uncertainty, particularly when pricing in thin markets.
Design/methodology/approach
The paper commences with an examination of risk analysis within investment decision making and the property industry, drawing on the findings of the most recent literature that assesses the utilisation of risk management approaches.
Findings
Financial risk management is examined and the workings of the D&B credit rating model illustrated. The paper explains the decision‐making framework within which the property risk score is applied.
Originality/value
The aim of this paper is to present an alternative paradigm for the reporting of risk based on techniques utilised within business applications. In particular it applies a standard credit‐rating technique, based on the D&B model, to report the level of risk within property pricing – property risk scoring (PRS).
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Rahmi Erdem Aktug, Nandu (Nandkumar) Nayar and Jesus M Salas
This paper aims to determine the equity and debt market reactions of firms to the news of their hiring a credit rating agency (CRA) analyst. Due to recent controversies related to…
Abstract
Purpose
This paper aims to determine the equity and debt market reactions of firms to the news of their hiring a credit rating agency (CRA) analyst. Due to recent controversies related to CRAs, the US Securities and Exchange Commission (SEC) requires disclosure of the hiring of an analyst if the analyst recently worked for a rating agency that previously provided a rating for the hiring firm. The authors use those filings to estimate the market value of a credit rating analyst to the hiring firm.
Design/methodology/approach
This paper examines the impact of analyst transfers from rating agencies to financial firms in the USA between 2006 and 2014.
Findings
The authors find that the hiring of such analysts suggests a value increase for the debt securities of the hiring firm but no such value phenomenon for the equity of the employer firm.
Research limitations/implications
Thus, markets apparently perceive that credit analysts bring valuable inside knowledge about potential clients and about the credit rating formation process to their employer.
Practical implications
This study confirms the need for additional disclosure from CRAs. This study could help the SEC as it discusses ways to require additional disclosure (those discussions are already taking place. New regulations will come out some time in the next couple of years).
Originality/value
This study is the first to examine the impact of such transfers on the prices of marketed securities of firms hiring such analysts.
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Simon Ofori Ametepey, Clinton Ohis Aigbavboa and Wellington Didibhuku Thwala
The essence of finance has become essential in the sustainability discussion in recent times as a result of the capital intensive nature of sustainable projects. This has…
Abstract
The essence of finance has become essential in the sustainability discussion in recent times as a result of the capital intensive nature of sustainable projects. This has motivated financial experts and institutions to develop various financial instruments and mechanisms to further advance the course of protecting the environment, and decreasing the release of excess carbon and GreenHouse Gases. This is to also provide the opportunity for funding Green or sustainable infrastructure development. This chapter advances a discourse on matters relating to sustainable financing of infrastructure projects. The fundamentals of sustainable or green funding of infrastructure projects, and sustainable schemes of financing green infrastructure projects are discussed.
Muhammad Adeel Ashraf and Ahcene Lahsasna
Customers of Islamic banking industry continue to be skeptical on Sharīʿah compliance of Islamic banks despite receiving fatwa from the competent authorities. The purpose of this…
Abstract
Purpose
Customers of Islamic banking industry continue to be skeptical on Sharīʿah compliance of Islamic banks despite receiving fatwa from the competent authorities. The purpose of this paper is to quantify the Sharīʿah risk taken by Islamic banks, so that customers are better informed on the level of Sharīʿah compliance that will help in removing the persistent level of skepticism toward Sharīʿah compliance.
Design/methodology/approach
This research has used the scorecard based modeling approach to build the Sharīʿah risk rating model, which consists of 14 factors that capture Sharīʿah risk and are grouped in 5 major areas revolving around regulatory support, quality of Sharīʿah supervision, business structure, product mix and treatment of capital adequacy ratio. The score calculated by applying the model is grouped into 4 tiers reflecting the level Sharīʿah compliance at bank as non-compliant, weak compliance, satisfactory compliance and high level of Sharīʿah compliance. Three case studies were conducted by applying the model to Islamic banks from Malaysia, Pakistan and Saudi Arabia.
Findings
The final Sharīʿah risk scores calculated by the model clearly differentiate the 3 banks on basis of their Sharīʿah risk. The underlying scores also highlighted the areas where banks need to improve to reduce their Sharīʿah risk.
Originality/value
This model can be applied by customers of Islamic banks who are interested in understanding Sharīʿah-related aspects of Islamic banking industry. This model can be applied on standalone basis or as an extension to the conventional counter party risk rating models. This model can benefit management of Islamic banks toward allocation of capital against Sharīʿah risk under Basel III, and regulators can apply the model to measure industry wide risk of Sharīʿah non-compliance.
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