The Difference between Agency Ratings and Expected Credit Levels and Corporate Financial Decisions

Kim, Sanghun; Kim, Byungmo

doi:2017.46.5.1089

Korean J Financ Stud > Volume 46(5); 2017 > Article

Korean Journal of Financial Studies 2017;46(5):1089-1119.
DOI: https://doi.org/10.26845/KJFS.2017.12.46.5.108 Published online December 31, 2017.

The Difference between Agency Ratings and Expected Credit Levels and Corporate Financial Decisions

Sanghun Kim, Byungmo Kim

회사채 신용등급 괴리와 기업의 재무 의사결정

김상헌, 김병모

단국대학교

Abstract

The paper computes the difference between agency ratings on corporate bonds and the expected ratings based on the credit model, and examines its effects on corporate financial decisions including debt financing, stockpiling of cash assets, investment expenditures, and bond issuing decisions. Using the firms listed on the KOSPI (Korea Composite Stock Price Index) market, we find that agency rating continues to exceed the expected credit levels during the sample period (1998~2015) and the difference affects corporate financial decisions. Firms that have agency rating better than the expected credit levels are likely to use more debts and have higher debt ratios. Their cash levels, investment expenditures, sales growth and the likelihood of issuing bonds are also high. The results show that the market fails to incorporate the rating difference in bond valuation and firms exploit it in their financial decisions. It raises concern that a firm’s bargaining power for debt rating might distort the asset allocation in corporate debt markets.

Key Words: 채권등급 괴리,부채비율,현금자산,투자,성장률,Credit Rating,Debt Ratio,Cash Assets,Investments,Sales Growth