Do Credit Rating Agencies Care About Our International Tax Planning Strategy When Assigning Credit Ratings?

2020 ◽  
Author(s):  
Zhiming Ma ◽  
Derrald Stice ◽  
Danye Wang
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Tax Planning ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Planning Strategy ◽  
International Tax

A comparative study of economic growth as a key determinant of sovereign credit ratings in Africa

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Misheck Mutize ◽  
McBride Peter Nkhalamba
Keyword(s):  
Economic Growth ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
African Union ◽  
African Countries ◽  
Content Type ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Sovereign Credit Ratings

PurposeThis study is a comparative analysis of the magnitude of economic growth as a key determinant of long-term foreign currency sovereign credit ratings in 30 countries in Africa, Europe, Asia and Latin America from 2010 to 2018.Design/methodology/approachThe analysis applies the fixed effects (FE) and random effects (RE) panel least squares (PLS) models.FindingsThe authors find that the magnitude economic coefficients are marginally small for African countries compared to other developing countries in Asia, Europe and Latin America. Results of the probit and logit binary estimation models show positive coefficients for economic growth sub-factors for non-African countries (developing and developed) compared to negative coefficients for African countries.Practical implicationsThese findings mean that, an increase in economic growth in Africa does not significantly increase the likelihood that sovereign credit ratings will be upgraded. This implies that there is lack of uniformity in the application of the economic growth determinant despite the claims of a consistent framework by rating agencies. Thus, macroeconomic factors are relatively less important in determining country's risk profile in Africa than in other developing and developed countries.Originality/valueFirst, studies that investigate the accuracy of sovereign credit rating indicators and risk factors in Africa are rare. This study is a key literature at the time when the majority of African countries are exploring the window of sovereign bonds as an alternative funding model to the traditional concessionary borrowings from multilateral institutions. On the other hand, the persistent poor rating is driving the cost of sovereign bonds to unreasonably high levels, invariably threatening their hopes of diversifying funding options. Second, there is criticism that the rating assessments of the credit rating agencies are biased in favour of developed countries and there is a gap in literature on studies that explore the whether the credit rating agencies are biased against African countries. This paper thus explores the rationale behind the African Union Decision Assembly/AU/Dec.631 (XXVIII) adopted by the 28th Ordinary Session of the African Union held in Addis Ababa, Ethiopia in January 2017 (African Union, 2017), directing its specialized governance agency, the African Peer Review Mechanism (APRM), to provide support to its Member States in the field of international credit rating agencies. The Assembly of African Heads of State and Government highlight that African countries are facing the challenges of credit downgrades despite an average positive economic growth. Lastly, the paper makes contribution to the argument that the majority of African countries are unfairly rated by international credit rating agencies, raising a discussion of the possibility of establishing a Pan-African credit rating institution.

scholarly journals Forecasting Credit Ratings of EU Banks

2020 ◽  
Vol 8 (3) ◽  
pp. 49
Author(s):  
Vasilios Plakandaras ◽  
Periklis Gogas ◽  
Theophilos Papadimitriou ◽  
Efterpi Doumpa ◽  
Maria Stefanidou
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Support Vector ◽  
Credit Rating Agencies ◽  
Selection Scheme ◽  
Explanatory Variables ◽  
Rating Agencies ◽  
Financial Variables ◽  
Forecasting Models ◽  
Banking Institutions

The aim of this study is to forecast credit ratings of E.U. banking institutions, as dictated by Credit Rating Agencies (CRAs). To do so, we developed alternative forecasting models that determine the non-disclosed criteria used in rating. We compiled a sample of 112 E.U. banking institutions, including their Fitch assigned ratings for 2017 and the publicly available information from their corresponding financial statements spanning the period 2013 to 2016, that lead to the corresponding ratings. Our assessment is based on identifying the financial variables that are relevant to forecasting the ratings and the rating methodology used. In the empirical section, we employed a vigorous variable selection scheme prior to training both Probit and Support Vector Machines (SVM) models, given that the latter originates from the area of machine learning and is gaining popularity among economists and CRAs. Our results show that the most accurate, in terms of in-sample forecasting, is an SVM model coupled with the nonlinear RBF kernel that identifies correctly 91.07% of the banks’ ratings, using only 8 explanatory variables. Our findings suggest that a forecasting model based solely on publicly available financial information can adhere closely to the official ratings produced by Fitch. This provides evidence that the actual assessment procedures of the Credit Rating Agencies can be fairly accurately proxied by forecasting models based on freely available data and information on undisclosed information is of lower importance.

scholarly journals The Effects of Employee Stock Options on Credit Ratings

2008 ◽  
Vol 83 (5) ◽  
pp. 1273-1314 ◽  
Author(s):  
Yen-Jung Lee
Keyword(s):  
Stock Options ◽  
Credit Rating ◽  
Credit Ratings ◽  
Fair Value ◽  
Cash Flows ◽  
Share Repurchases ◽  
Credit Rating Agencies ◽  
Employee Stock Options ◽  
Rating Agencies ◽  
Unfavorable Effect

ABSTRACT: This paper examines whether outstanding employee stock options (ESOs), which represent the firm’s contractual obligation to deliver shares upon ESO exercise, affect firms’ credit ratings. I hypothesize that outstanding ESOs play two information roles—(1) suggesting equity infusion, and (2) predicting share repurchases—that help credit-rating agencies evaluate the issuing company’s debt service ability. Consistent with these hypothesized roles, results indicate that the present values of expected cash proceeds and tax benefits from ESO exercise have favorable effects on credit ratings. In contrast, the present value of the expected cost of ESO-related share repurchases has an unfavorable effect on credit ratings and this unfavorable effect is more pronounced for firms with a greater tendency to repurchase shares. The after-tax fair value of outstanding ESOs, which summarizes the effects of the above three ESO-related cash flows, is negatively associated with credit ratings. Taken together, these findings are consistent with credit-rating agencies incorporating the information conveyed by outstanding ESOs regarding potential equity infusion and ESO-related repurchases in their credit risk assessments and assigning lower credit ratings to firms with greater values of outstanding ESOs.

scholarly journals The Role of Credit Rating Agencies in Sovereign Debt Markets

2018 ◽  
pp. 146-166
Author(s):  
Aline Darbellay
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Debt Crisis ◽  
Credit Ratings ◽  
Credit Rating Agencies ◽  
Past Century ◽  
The European Union ◽  
Rating Agencies ◽  
Sovereign Credit Ratings

Since the global financial crisis of 2007-2009, the leading credit rating agencies (CRAs) have faced an increasing level of legal and regulatory scrutiny in the United States (US) and in the European Union (EU). This chapter sheds light on the promise and perils of sovereign credit ratings in the light of the European sovereign debt crisis. The leading CRAs have been blamed for providing investors with inaccurate credit ratings, facing inappropriate incentives and lack of oversight. This chapter addresses the evolving function performed by CRAs over the past century. Traditionally, CRAs are private market actors assessing the creditworthiness of borrowers and debt instruments. Since the first sovereign bond ratings assigned in 1918, the rating business has grown in size and importance. Sovereign ratings supposedly predict financial distress of governments. Their role has shifted over the last four decades. Although they have repeatedly been blamed for being poor predictors of sovereign debt crises, CRAs continue to play a key role in modern capital markets.

scholarly journals Does corporate ownership affect credit risk?: An investment grade vs non-investment grade firm analysis – evidence from South Korea

2016 ◽  
Vol 13 (4) ◽  
pp. 38-49
Author(s):  
Dafydd Mali ◽  
Hyoungjoo Lim
Keyword(s):  
Default Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Foreign Ownership ◽  
Credit Rating Agencies ◽  
Corporate Ownership ◽  
Controlling Shareholders ◽  
Rating Agencies ◽  
Corporate Ownership Structure ◽  
Investment Grade

A credit rating indicates a firm’s risk of financial default. Using 1) controlling shareholders’ ownership and 2) foreign investors’ ownership as proxies for corporate governance, we investigate whether corporate ownership structure influences a credit rating agencies’ perception of risk. Using a sample of 1,213 KRX firm-year observations, and a t+1 approach, we find that firms with higher foreign ownership have higher credit ratings compared to those with lower foreign ownership. Moreover, we find that higher percentage of shareholder ownership does not affect credit ratings for our initial sample; however, after dividing our sample into investment/non-investment grade samples, we find a positive/negative relation for investment/non-investment firms. The results suggest credit rating agencies perceive the relation between corporate ownership and default risk differently for investment/non-investment grade firms

Part VII International Securities, Including Markets and Clearing Systems, 21 Credit Rating Agencies

2021 ◽  
Author(s):  
Eborall Charlotte
Keyword(s):  
Information Asymmetry ◽  
Credit Rating ◽  
Global Financial Crisis ◽  
Credit Ratings ◽  
The United States ◽  
Credit Rating Agencies ◽  
Rating Agencies ◽  
Market Participants ◽  
The Global Financial Crisis ◽  
Independent Assessment

This chapter concentrates on credit rating agencies (CRAs), which play a key role in financial markets. It explains how CRAs help reduce information asymmetry between investors and issuers by providing an independent assessment of the relative creditworthiness of countries or companies. It also describes how CRA's role has expanded significantly in recent decades with financial globalization, such as the introduction of references to credit ratings in regulations and the embedding by market participants of ratings in their operating procedures, investment decisions, and contracts. This chapter identifies the heavy reliance on CRAs as one of the main contributors to the global financial crisis in 2008. It also talks about the efficacy of CRAs' credit ratings after 2008, in which regulators in the United States (US) and Europe introduced new regulations intended to address the reliability of CRAs' predictions of probability of default.

Are Transfer-Dependent Governments More Creditworthy? Reassessing the Fiscal Federal Foundations of Subnational Default Risk

2018 ◽  
Vol 50 (4) ◽  
pp. 1381-1403 ◽  
Author(s):  
Kyle Hanniman
Keyword(s):  
Default Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Statistical Analyses ◽  
Credit Rating Agencies ◽  
Fiscal Discipline ◽  
Rating Agencies ◽  
International Credit ◽  
Fiscal Distress ◽  
Cross National

AbstractMany fiscal federal scholars argue, often implicitly, that transfer dependence generally bolsters subnational creditworthiness by signalling a higher likelihood of national bailouts for distressed governments. This article argues that dependence fails to bestow general benefits on local borrowers because it suggests an inability to generate additional revenues in the event of fiscal distress, and because this inability does not, contrary to the expectations of many, necessarily translate into higher bailout expectations. Ultimately it is the nature, not the level, of transfers that affects local creditworthiness, whether through bailout or non-bailout channels. Stable and predictable payments, including robust equalization systems, support local creditworthiness, while volatile and unpredictable transfers do not. The article supports these arguments with a review of documents issued by the major international credit rating agencies and cross-national statistical analyses of bailout probabilities and standalone credit ratings issued by Moody’s Investors Service. It also discusses the implications of the findings for work on the fiscal discipline of subnational governments.

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