A Multi-Country Study of Factors Affecting Credit Ratings Revisions

Ng, Angeline Siew-Huan; Mohamed, Mohamed Ariff Syed

doi:10.33736/ijbs.3362.2020

Cited by 1 publication

(4 citation statements)

References 52 publications

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“…For US35 tn capitalization prior to revisions, this will be equal to US$280 bn around the time of the announcement. These results are similar to the results for a different set of countries in Ng and Ariff (2020).…”

Section: Frequency Of Rating Changes As a Country Risk Variable For 2...supporting

confidence: 89%

“…What effects do revisions have on stock markets of the sample of countries? This is found in the study of Ng and Ariff (2020) as debt having adverse effect on capital markets of the countries experiencing credit downgrades is studied in the paper. Also note that these 20 counties at the time of downward rating changes during 1999-2019 had billions of dollars of stock market capitalization as briefly explained in Appendix 2 at the end of this paper.…”

Section: Background and Objective 11 Research Objectives And Motivationmentioning

confidence: 84%

“…The market is the place to test if investors take note of the impact of the evidence of CRAs revising existing rating scores, so in this paper, we assume credit rating changes do affect capital market prices of the countries as reported in FN #2. Ng and Ariff (2020) had shown investors do quickly reduce or increase security prices in stock markets of five countries when at each time country ratings change for a rated unit in several countries (see Appendix 3 at the end of this paper showing two sets of data from the 20 countries used in our study). The stock markets of all countries studied absorb CRA rating news promptly as predicted by the good and bad news of upgrading and downgrading affecting the country's capitalization values.…”

Section: Background and Objectivementioning

confidence: 99%

“…3. This experiment has been completed for a subset of countries (not all 20), and the paper is just published as Ng and Ariff (2020). This paper shows how ratings affect the stock prices of issuers.…”

Section: Notesmentioning

confidence: 99%

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A multi-country study of factors and threshold values affecting sovereign debt-taking behavior

Tahmoorespour

Ariff

Lee

et al. 2022

IJMF

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PurposeThis manuscript reports evidence on how debt-taking decisions of top management in a multi-country setting do affect credit rating scores assigned by credit rating agencies (CRAs) as global monitors of creditworthiness of borrowers. This aspect has been long ignored by researchers in the literature. The purpose of this paper is twofold. A test model is specified first using theories to connect debt-taking behavior to credit rating scores. Once that model helps to identify a number of statistically significant factors, the next step helps to identify threshold values at which the variables driving debt-taking behavior would worsen the credit rating scores as turning points of the thresholds.Design/methodology/approachThe study identifies factors driving creditworthiness scores due to debt-taking behavior of countries and develops a correct research design to identify a model that explains (1) credit rating scores and the factors driving the scores and runs (2) panel-type regressions to test model fit. Having found factors driving debt-taking behavior by observed units, the next step identifies threshold values of factors at which point further debt-taking is likely to worsen credit rating risk of the observed units. This is a robustness test of the methodology used. The observed units are 20 countries with data series across 14 years.FindingsFirst, new findings suggest there are about six major factors associated with debt-taking behavior and credit rating changes. Second, the model developed in this study is able to account for substantial variability while the identified factors are statistically significant within the normal p-values for acceptance of hypotheses. Finally, the threshold values of factors identified are likely to be useful for managerial decisions to judge the levels at which further debt-taking would worsen the credit rating scores of the observed units.Research limitations/implicationsThe observed units are from 20 countries over 14 years of annual data available on credit rating scores (privately obtained from Standard and Poor [S&P]). The sample represents major economies but did not include emerging countries. In that regard, it will be worthwhile to explore the debt-taking behavior of emerging economies in a future study using the methodology verified in this study.Practical implicationsThe findings help add few useful guidelines for top management decisions. (1) There are actually factors that are associated with debt-taking behavior, so the authors now know these factors as guides for managerial actions. (2) The authors are free to state that the credit rating changes occur on objective changes in the factors found as significantly related to the debt-taking behavior. (3) The threshold values of key factors are known, so top management could use these threshold values of named factors to monitor if a debt-taking decision is going to push the credit rating to a worse score.Social implicationsThere are society-wide implications. Knowing that the world's debt level is high at US$2.2 for each gross domestic product (GDP) dollar across almost 200 countries, any knowledge on what factors help drive creditworthiness scores, thus credit riskiness, is revealed in this paper. Knowing those factors and also knowing the turning points of the factors – the threshold values – likely to worsen creditworthiness scores is a powerful tool for controlling excessive debt-taking by an observation unit included in this study (The dataset in this research can also be used to see inter-temporal movement on debt-taking in a future study).Originality/valueIn the authors' view, there are many studies on debt-taking behavior. But none has connected debt-taking on how (1) named factors are observable to management that affect credit rating changes and (2) if a factor affects creditworthiness, at which point of the factor value, the creditworthiness will flip to worsen the score. These aspects are seldom found in the literature. Hence, the paper is original with practical value at the global level.

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Section: Frequency Of Rating Changes As a Country Risk Variable For 2...supporting

confidence: 89%

Section: Background and Objective 11 Research Objectives And Motivationmentioning

confidence: 84%

Section: Background and Objectivementioning

confidence: 99%

Section: Notesmentioning

confidence: 99%

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