National Culture and Corporate Rating Migrations

Abstract

The informal constraints that arise from the national culture in which a firm resides have a pervasive impact on managerial decision making and corporate credit risk, which in turn impacts on corporate ratings and rating changes. In some cultures, firms are naturally predisposed to rating changes in a particular direction (downgrade or upgrade) while, in other cultures, firms are more likely to migrate from the current rating in either direction. This study employs a survival analysis framework to examine the effect of national culture on the probability of rating transitions of 5360 firms across 50 countries over the period 1985-2010. Firms located in long-term oriented cultures are less likely to be downgraded and, in some cases, more likely to be upgraded. Downgrades occur more often in strong uncertainty-avoiding countries and less often in large power distance (hierarchy) and embeddedness countries. There is some evidence that masculinity predisposes firms to more rating transitions. Studying culture helps enrich our understanding of corporate rating migrations, and helps develop predictive models of corporate rating changes across countries.

Sovereign ratings and national culture

“…Culture also influences the adoption of bank-based vs stock market-based financial system (Kwok and Tadesse, 2006), investor legal rights (Licht, Goldschmidt, Schwartz, 2005), and mortgages defaults (Tajaddini and Gholipour, 2017). Of particular relevance to our study is the work of Dang (2018) who shows that national culture affects the probability of changes in corporate ratings. 3 The Greek sovereign debt crisis is one striking example where culture has been argued to play a major role.…”

“…The duration of a rating grade depends upon the hazard of a rating change. We apply the premier hazard model, Cox's hazard model (Cox, 1972), which has been used both for analysing sovereign rating migrations as in Hill et al (2010) and for analysing corporate rating migrations as in Dang and Partington (2014) and Dang (2018). Our use of the Cox's model is additionally motivated by its convenience in handling censored observations, time-varying variables and multiple rating changes.…”

“…That is, a country should not be considered at risk of a later rating change, say the fifth change, before the earlier changes, say the fourth change has occurred. Similar to Dang and Partington (2014) and Dang (2018), we estimate Cox's hazard models with stratification, so that rating changes that have the same number of prior changes are grouped in the same strata. The stratification technique allows the underlying hazard of a rating change to vary according to the number of prior changes and it also ensures that rating changes are not considered out of sequence.…”

“…As in Dang (2018), the covariates that we use are of two types, time-varying and time-fixed. Consequently, in most cases, there was limited time for substantial changes in the magnitude of the variables treated as time-fixed.…”

Special Issue “Risk, Ruin and Survival: Decision Making in Insurance and Finance”

“…Dang (2018) offers a cross-disciplinary explanation of this phenomenon and establishes a link between culture and corporate rating migration. In particular, Dang (2018) shows that studying culture helps to enrich our understanding of credit rating decisions, which in turn can be helpful in developing predictive models of corporate rating changes across countries.…”