Callable Bonds, Reinvestment Risk, and Credit Rating Improvements: Role of the Call Premium

Credit analysis is more than just a quantitative exercise because qualitative factors can influence creditor decisions to lend funds. This chapter discusses the importance of balancing the strengths and weaknesses of quantitative characteristics with an analysis of qualitative characteristics. The extension of credit from a lender to a business is a decision that should follow the careful analysis of factors recognized as industry structuring tools. The “five Cs of credit” provide a framework to begin a qualitative assessment of a company, for without context, financial analysis is almost meaningless. A subsequent discussion of business, industry, and economic analysis rounds out the qualitative considerations. The chapter also offers a discussion of the critical role of the credit rating agencies as gatekeepers. Finally, a review of financial statements, metrics, ratio analysis, and firm capital structure provides a broad view of the firm when conducting a financial analysis. The chapter presents a case study to illustrate key principles.

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The Regulatory Role of Credit Ratings and Voluntary Disclosure

The Accounting Review ◽

10.2308/tar-2018-0286 ◽

2021 ◽

Author(s):

Riddha Basu ◽

James P. Naughton ◽

Clare Wang

Keyword(s):

Voluntary Disclosure ◽

Credit Rating ◽

Credit Ratings ◽

Regulatory Role ◽

Rating Agencies ◽

Corporate Credit ◽

Quasi Experimental ◽

Rating Changes ◽

Corporate Credit Rating

We find that corporate credit rating changes have an effect on firms' voluntary disclosure behavior that is independent of the information they convey about firm fundamentals. Our analyses exploit two separate quasi-experimental settings that generate either exogenous credit rating downgrades or credit rating upgrades (i.e., credit rating label changes). We find evidence of a negative relation between the direction of the credit rating label change and the provision of voluntary disclosure in both settings-firms respond to exogenous downgrades by increasing voluntary disclosure and to exogenous upgrades by decreasing voluntary disclosure. The effects we document are attributable to the regulatory role rather than the information role of credit ratings. Overall, our analyses indicate that credit rating agencies as gatekeepers influence firms' provision of voluntary disclosure.

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Are Credit Rating Agencies Useless? The Role of Rating Agencies in European Bond Markets: Information Transmission vs. Spread Stabilization

SSRN Electronic Journal ◽

10.2139/ssrn.1836888 ◽

2011 ◽

Author(s):

Philippe Raimbourg ◽

Jean-Noël Ory

Keyword(s):

Information Transmission ◽

Credit Rating ◽

Credit Rating Agencies ◽

Bond Markets ◽

Rating Agencies

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Information as a condition of justice in financial markets: The regulation of credit-rating agencies

10.1093/oso/9780198755661.003.0011 ◽

2017 ◽

Cited By ~ 1

Author(s):

Boudewijn de Bruin

Keyword(s):

Credit Risk ◽

Financial Markets ◽

Institutional Investors ◽

Credit Rating ◽

Credit Rating Agencies ◽

Informational Needs ◽

Sources Of Information ◽

Rating Agencies ◽

Mortgage Backed Securities

This chapter argues for deregulation of the credit-rating market. Credit-rating agencies are supposed to contribute to the informational needs of investors trading bonds. They provide ratings of debt issued by corporations and governments, as well as of structured debt instruments (e.g. mortgage-backed securities). As many academics, regulators, and commentators have pointed out, the ratings of structured instruments turned out to be highly inaccurate, and, as a result, they have argued for tighter regulation of the industry. This chapter shows, however, that the role of credit-rating agencies in achieving justice in finance is not as great as these commentators believe. It therefore argues instead for deregulation. Since the 1930s, lawgivers have unjustifiably elevated the rating agencies into official, legally binding sources of information concerning credit risk, thereby unjustifiably causing many institutional investors to outsource their epistemic responsibilities, that is, their responsibility to investigate credit risk themselves.

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Sovereign Credit Ratings and Asian Financial Markets

E+M Ekonomie a Management ◽

10.15240/tul/001/2021-1-011 ◽

2021 ◽

Vol 24 (1) ◽

pp. 165-181

Author(s):

Khansa Pervaiz ◽

Zuzana Virglerová ◽

Muhammad Asif Khan ◽

Usman Akbar ◽

József Popp

Keyword(s):

Financial Markets ◽

Financial Market ◽

Credit Rating ◽

Credit Ratings ◽

Market Development ◽

Sovereign Credit ◽

Sovereign Credit Ratings ◽

Financial Market Development ◽

Sovereign Credit Rating

Each region/country seeks to become more efficient to gain the confidence of potential investors. Most of the Asian economies are categorized as emerging markets, where the role of financial markets has even become more intensified to provide financial services to increasing economic and financial activities. Asian financial market has momentously suffered during the Asian, and global financial crisis. The mass destruction was mainly caused due to the mounting uncertainty, which spillover throughout the region, where investors lost their confidence. Considering the pivotal economic role of financial markets, and implications evolve due to sovereign credit rating announcements, this study aims to model the role of sovereign credit rating announcements by Standard and Poor’s, and Moody’s on financial market development of the Asian region. For 24 Asian countries/regions, we perform a regression analysis on sovereign credit rating changes based on financial market development index and its factors. The findings of Driscoll Kraay’s robust estimator reveals that improvement in sovereign credit rating score enhances the financial market development in the region. Moreover, we applied several robustness checks, such as alternative estimators, alternative measures, and three sub-dimensions of financial market development. According to the findings from these robustness checks, the positive impact of sovereign credit ratings on financial market development in the region is robust. Unlike prior literature (which is confined to the event study approach), this study utilizes the historical grades to establish the relationship under the standard error clustering approach. Due to the diversity of investors’ speculations, we propose a micro-level extension of the present model to overcome a difference in country policy.

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