Journal of Credit Risk

Risk.net

The influence of firm efficiency on agency credit ratings

Dafydd Mali and Hyoungjoo Lim

  • We find a positive relationship between relative efficiency and credit ratings in the subsequent period after adjusting for absolute efficiency.
  • Our results suggest that credit rating agencies consider relative efficiency as a variable that influences a firm’s ability to survive a business cycle.
  • After partitioning our samples into investment and non-investment grade firms, whilst we continue to find consistent results for the IG group, we find a negative relationship for NIG firms.
  • We suggest higher levels of efficiency by NIG firms can be considered opportunistic or a form of distress and potentially the result of infective decision making.
     

This paper examines the relationship between relative efficiency and credit ratings using a sample of Korean listed firms and finds a positive relationship in the subsequent period after adjusting for absolute efficiency. The results suggest that credit rating agencies consider relative efficiency as a variable that influences a firm’s ability to survive a business cycle. Interestingly, when we divide our samples into investment- grade and non-investment-grade firms, we find a different relationship. While we continue to find consistent results for the investment-grade group, we find a negative relationship between relative efficiency and credit ratings for non-investment-grade firms. We suggest “higher” levels of efficiency by non-investment-grade firms can be considered opportunistic or a form of distress, and potentially be the result of ineffective decision making. We conjecture that credit rating agencies have the ability to impose penalties of lower credit ratings on firms that engage in such behavior.

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: