The impact of market sectors and rating agencies on credit ratings: global evidence

2019 ◽  
Vol 20 (5) ◽  
pp. 389-410
Author(s):  
Kerstin Lopatta ◽  
Magdalena Tchikov ◽  
Finn Marten Körner
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Content Type ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Investment Grade ◽  
The Impact ◽  
Rating Downgrades

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.

scholarly journals Empirical evolution of credit risk over a decade in IBEX. 35 companies and its relationship with the qualification of its ratings

2020 ◽  
Vol 16 (2) ◽  
pp. 61
Author(s):  
Josep Patau
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Clear Correlation ◽  
Crisis Period ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Determining Factors ◽  
Commercial Loans ◽  
The One

Object: The present work responds to two objectives. On the one hand, it describes the evolution of the main economic-financial indicators that influence credit risk (insolvency) for a sample of 10 Spanish companies listed on the IBEX 35. This analysis is studied for a comparative period of 10 years, which coincides with a pre-crisis stage (2002-2005) and an economic post-crisis phase (2012-2015). On the other hand, it corroborates the relationship between the analysed insolvency and the rating or credit-risk rating published for these companies by an internationally recognized credit rating agency, Standard & Poor's (S & P).Design / methodology: A sample of 10 companies and a 10-year period including the years 2002-2005 (pre-crisis) and the years 2012-2015 (post-crisis) are chosen, omitting the Spanish economic crisis that occurred in the year 2008. For the study of its evolution, 6 ratios obtained from the scientific literature that relate to credit risk and its effects on investments and company results are calculated. Finally, the correlations of these variables with the ratings of credit risk assessment by the rating agency S & P are measured. Descriptive statistics will assign value and graphics to this ten-year evolution, and with the incorporation of a factorial analysis, the correlation between the ratios and the S & P rating will be determined. The statistical analysis explains this correlation to a greater extent.Contributions / results: The results show a clear increase in the value of the impairment variable due to credit risk ten years later that directly affects the results of the companies, despite these companies having significantly reduced their investments in commercial loans pending collection and drastically reduced the period means of collection of clients. In turn, there is a clear correlation between the insolvency studied and the variables used by the S & P rating agency for the assessment of credit risk.Added value / conclusions: The empirical study concludes that there is a correspondence between insolvency and the rating given by an internationally prestigious rating agency (S & P) for the sample of 10 companies studied. Three variables – customer balance-accounts receivable, investments and the net amount of turnover – are determining factors explaining this correlation, and these three variables are the same ones that decisively influence both the pre-crisis period and the post-crisis period 10 years apart. The rating agencies weigh the insolvency variable in their analyses.

Credit risk signals in CDS market vs agency ratings

2016 ◽  
Vol 17 (2) ◽  
pp. 194-217 ◽  
Author(s):  
Michael Jacobs Jr ◽  
Ahmet K. Karagozoglu ◽  
Dina Naples Layish
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Default Swap ◽  
Risk Assessments ◽  
Content Type ◽  
Rating Agencies ◽  
Market Participants ◽  
Credit Default ◽  
The Relationship

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.

A Bayesian inference model for the credit rating scale

2016 ◽  
Vol 17 (4) ◽  
pp. 390-404 ◽  
Author(s):  
Philipp Gmehling ◽  
Pierfrancesco La Mura
Keyword(s):  
Bayesian Inference ◽  
Credit Risk ◽  
Credit Rating ◽  
Rating Scale ◽  
Credit Rating Agencies ◽  
Model Framework ◽  
Content Type ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Limited Accuracy

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.

The impact of risk rating agencies decisions on investment and economic growth in South Africa

2020 ◽  
Vol 11 (1) ◽  
pp. 109-109
Author(s):  
Daniel Meyer ◽  
Lerato Mothibi
Keyword(s):  
Economic Growth ◽  
South Africa ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
Primary Objective ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Investment Grade ◽  
The Impact

Over the last decade, the South African economy has endured prevailing economic challenges including weak economic growth, unreliable electricity supply, rising fiscal deficits, sub-duded investment inflows and the inexorable rise in government debt alongside the expected impact of the corona virus pandemic. Credit ratings have greatly evolved making them key elements in the modern financial markets because of their opinions of credit worthiness, as many investors across the globe relay heavily on their opinions. South Africa unlike many of its developing counterparts, has since struggled to maintain its sovereign ratings above non-investment grade since the 2007/2008 global financial crisis. Despite the economic constraints faced by the country, the sovereign credit downgrade path has landed the country's financial stance back prior to democracy, following the loss of investment grade rating from the big three credit rating agencies. The significance of credit ratings on investments and growth has therefore come to the fore, as having an understanding of how credit ratings affect investments and economic growth in South Africa is crucial for the formulation of key strategies that should be developed to stimulate and attract investments, as well as encourage and promote long term growth and development. The primary objective of this study is therefore to analyse the impact of sovereign credit rating on investments and economic growth in South Africa.

Do asset sales affect firm credit risk? – Evidence from credit rating assignments

2014 ◽  
Vol 40 (9) ◽  
pp. 903-927 ◽  
Author(s):  
Vinod Venkiteshwaran
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Ordered Probit ◽  
Asset Sales ◽  
Content Type ◽  
Credit Quality ◽  
The One ◽  
Opposing Effects ◽  
The Impact

Purpose – Asset sales can have opposing effects on firm credit quality. On the one hand asset sales could signal increased credit risk resulting from distress or on the other hand they could improve internal liquidity and hence credit quality. Therefore the impact potential asset sales can have on credit quality is an empirical question and one that has previously not been examined in the literature. The paper aims to discuss these issues. Design/methodology/approach – Using credit ratings as a measure of firm credit quality, in ordered probit regressions, this study finds evidence consistent with the internal liquidity view of the asset sales-credit risk relationship. Findings – Results from ordered probit regressions of credit ratings show that the likelihood of higher credit ratings is increasing in industry-level turnover of real assets Originality/value – Credit-rating agencies often cite the impact of asset sales on firm credit quality as a motivation for their rating assignments. Distress-driven asset sales could reduce firm credit quality whereas other asset sales could result in increased internal firm liquidity and hence improve firm credit quality. This bi-directional expectation leaves the question of how asset sales affect credit quality to be answered empirically and has not been previously tested in the literature.

Are credit rating agency analysts valuable?

2015 ◽  
Vol 16 (4) ◽  
pp. 378-394 ◽  
Author(s):  
Rahmi Erdem Aktug ◽  
Nandu (Nandkumar) Nayar ◽  
Jesus M Salas
Keyword(s):  
Credit Rating ◽  
Securities And Exchange Commission ◽  
Market Reactions ◽  
Content Type ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Financial Firms ◽  
The Usa ◽  
Debt Market ◽  
The Impact

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.

Evaluating Proposed Remedies for Credit Rating Agency Failures

2014 ◽  
Vol 89 (4) ◽  
pp. 1399-1420 ◽  
Author(s):  
S. Jane Jollineau ◽  
Lloyd J. Tanlu ◽  
Amanda Winn
Keyword(s):  
Financial Crisis ◽  
Credit Rating ◽  
Credit Ratings ◽  
Quantitative Model ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Rating Agency

ABSTRACT: Regulators and the financial press have criticized credit rating agencies (CRAs) for exacerbating the financial crisis by providing overly optimistic debt ratings. Allegedly, CRAs departed from their quantitative models in order to please security issuers with higher credit ratings. In response, the Dodd-Frank Act of 2010 required the Securities and Exchange Commission to conduct a study on alternative models for compensating CRAs. We conduct an experiment exploring how the credit ratings of M.B.A. students, who assume the role of credit rating analysts, are affected by two proposals for reform: (1) changing who pays the CRAs, and (2) requiring analysts to justify departures from a quantitative model. We find that credit ratings are highest when the borrower pays CRAs for ratings and a justification requirement is not in place. Implementing either proposed reform independently reduces credit ratings, but credit ratings are not further reduced when both reforms are implemented together. Data Availability: Data are available from the authors upon request.

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Misheck Mutize ◽  
McBride Peter Nkhalamba
Keyword(s):  
Economic Growth ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
African Union ◽  
African Countries ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings

PurposeThis study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.Design/methodology/approachThe analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.FindingsThe authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.Practical implicationsThese findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.Originality/valueFirst, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

Are Credit Ratings More Rigorous for Widely Covered Firms?

2018 ◽  
Vol 93 (6) ◽  
pp. 61-94 ◽  
Author(s):  
Samuel B. Bonsall ◽  
Jeremiah R. Green ◽  
Karl A. Muller
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Economic Consequences ◽  
Data Availability ◽  
Press Coverage ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Business Press ◽  
Market Participants ◽  
Reputational Costs

ABSTRACT We study how business press coverage can discipline credit rating agency actions. Because of their greater prominence and visibility to market participants, more widely covered firms can pose greater reputational costs for rating agencies. Consistent with rating agencies limiting such risk, we find that ratings for more widely covered firms are more timely and accurate, downgraded earlier and systematically lower in the year prior to default, and better predictors of default and non-default. We also find that the recent tightening of credit rating standards is largely explained by growing business press coverage of public debt issuers. Additionally, we find that credit rating agencies take explicit actions to improve their ratings by assigning better educated and more experienced analysts to widely covered firms. Moreover, we document that missed defaults of more visible firms create greater negative economic consequences for rating agencies, and that rating improvements following the financial crisis were greater for more visible firms. Data Availability: All data are publicly available from the sources identified in the text.

Do managers manipulate earnings to influence credit rating agencies’ decisions?

2017 ◽  
Vol 16 (3) ◽  
pp. 366-384
Author(s):  
Qiuhong Zhao
Keyword(s):  
Earnings Management ◽  
Credit Rating ◽  
Conflicts Of Interest ◽  
Real Earnings Management ◽  
Management Behavior ◽  
Wall Street ◽  
Content Type ◽  
Credit Rating Agency ◽  
Rating Agency ◽  
Management Measures

Purpose This study aims to investigate whether firms engage in earnings management behavior that attempts to manipulate Credit Rating Agency (CRA) perceptions during the Watchlist process and, if so, whether earnings management behavior appears to influence CRAs’ decisions. Design/methodology/approach To measure earnings management activities, this paper computes accrual-based and real earnings management measures in the year or in the quarter immediately before the Watchlist resolutions for all negative and positive Watchlist firms. To examine the association between the levels of earnings management and Watchlist resolutions, a logit model is applied to the data obtained from a sample of Watchlist firms. Findings Some evidence suggests that managers in Watchlist firms manage earnings in attempts to gain favorable Watchlist treatment. The findings are consistent with the Graham et al.’s (2005) survey evidence, which shows that one of the primary reasons for earnings management is to gain (or preserve) a desirable rating. In addition, CRAs appear to be misled by these attempts during the negative Watchlist process period. Research limitations/implications The findings support SEC’s (2011, 2013a, 2013b) rules to reduce its reliance on credit ratings and the recent regulation reforms concerning the competition in the rating industry [the Credit Rating Agency Reform Act (2006)], and concerning conflicts of interest of CRAs among others [Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)]. Originality/value While many studies examine whether managers use discretionary accruals as a tool to manage earnings to obtain favorable ratings, those studies do not consider manipulation of real operating activities to manage earnings and CRA perceptions.

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