Ebook Financial Attributes, Corporate Governance and Target Credit Rating
Credit rating plays a crucial role on financial markets. First, it can improve the quality of disclosed information by allowing more transparency. Second, it has not only designed to allow the firm access to the market, but also facilitates the access to bank credit. The importance of the credit rating is revealed by the significant reactions of bonds stock prices towards the favorable changes of credit rating (Ederington and Goh, 1998 ; Ederington and al., 1987; Hand and al., 1992). This importance justifies the proliferation of academic studies integrating credit rating as one of the most important factors that can explain the changes of the firm’s leverage and its adjustment towards the target (Flannery and Rangan, 2006 ; Hovakimian and al., 2001; Leary and Roberts, 2005; Kisgen, 2009).
Although the credit rating agencies publish their rating criterions, a growing area of research is devoted to identify credit rating determinants. In order to give a credit rating to firms, the agencies are based on the analysis of the firm’s stability, the financial and economic situation and the monetary and fiscal policy. The data of this analysis are given from balance sheets and income statements over several years, planning documents, internal control methods, interviews with managers etc. For this reason, several academic researches investigates whether some financial attributes may significantly affect the credit rating to the firm (Ashbaugh-Skaife and al., 2006 ; Ederington, 1985 ; Minardi, 2007 ; Resti and Omachi, 2001). Researchers, also, have tried to consider some corporate governance mechanisms as credit rating determinants (Bradley and al., 2008 ; Gompers and al., 2003 ; Litov, 2005). Recently, the credit rating agencies themselves are interested in the firm’s governance mechanisms. Indeed, the international agency “Standard and Poor's” has developed, in 2002, a rating product based on corporate governance.
Moreover, relevant researches studied the impact of some corporate governance mechanisms on the financial decisions by share issues (McConnell and Servaes, 1990 ; Yermack, 1996 ; Karpoff and al., 1996 ; Gompers and al., 2003, Cremers and al., 2006). Other studies investigated the impact of corporate governance on the rating of debt and on the financing cost of the debt issues (Sengupta, 1998 ; Bhojraj and Sengupta, 2003 ; Bradley and al., 2008).
Sengupta (1998) found a negative relationship between disclosure quality ratings and the cost of debt. Bhojraj and Sengupta (2003) exposed that firms with higher independence board and significant institutional ownership benefit from the lower yields of obligation and the higher ratings on newly issued debt. An extensive financial literature is devoted to study corporate governance. However, these studies may be improved and extended to address new questions. Among these researches, Hovakimian et al. (2009) confirm that managers make operating, financing and investment choices that allow them to achieve their target credit rating. This can be explained by the fact that the leverage level of the firm depends on its credit rating. But, several criticisms can be addressed to these studies. First, they did not identify the specific factors that may induce firms to reach their target rating. Second, they did not take into account possible interactions between the determinants of desired ratings. They have tested only the individual effect of each determinant.
Taking into account these criticisms addressed to the studies on target credit rating, we seek in this paper to emphasize on the factors that managers can use to adjust their current ratings to those desired. We try to focus more on the interactions between these factors and their effects on the credit rating target. Thus, this paper attempts to answer the following question: How are the managers using their financial attributes and governance mechanisms to target their credit rating?
The question allows us to identify the real determinants used by credit rating agencies to attribute credit rating to firms. These credit ratings may either facilitate to the firm the access to some financing sources or impede the firm’s business continuity. Therefore, it is necessary to know firm’s specific factors that could change their current credit rating and allow the adjustment towards desired rating target.
Download
PDF Ebook Financial Attributes, Corporate Governance and Target Credit Rating
Posted in :
