Abstract:
The respective study covers three aspects; factors determining credit rating, credit rating impact on performance of entities and the relation between stock returns and credit rating. The study focuses on the firms listed in Taiwan Stock Exchange (TSE) of Taiwan. The empirical analysis uses the data of 50 firms rated by Taiwan Ratings Corporation (TRC) for the period 2010-2015. Two estimation techniques Ordered Probit Model and Panel Data Regression are applied. The findings show that credit ratings are predicted by specific important firm factors like size, growth opportunities, capital intensity, asset returns, sector type etc. Moreover, it is further suggested that firms with higher credit rating tend to have better performance. Performance is measured using return on investment and Tobin’s q factors. Likewise, high rated firms tend to achieve higher returns on their stocks. Similar study should be carried out using other credit ratings covering more firms and time span.
Machine summary:
Analyzing the Impact of Credit Ratings on Firm Performance and Stock Returns: Evidence from Taiwan Maham Ijaz1, Abdul Rafay*2, Yang Chen3, Muhammad A.
B. Naeem4 Received: 2017, April 3 Accepted: 2017, October 28 Abstract he respective study covers three aspects; factors determining creditrating, credit rating impact on performance of entities and the relation between stock returns and credit rating.
No such study was ever conducted in Taiwan to confirm that (1) credit risk ratings are predicted by important firm specific factors like size, growth opportunities, capital intensity, asset returns, sector type etc.
The dependent variable is credit rating, which has further divided into three categories, conveying ordinal risk evaluation; 1st category rating: AAA, AA, A 2nd category rating: BBB, BB, B 3rd category rating: CCC, CC, C, D Table 1: List of Variables Variables Symbol Construction Credit Rating CR Ratings assigned by TRC Entity size Size Log of Total Assets Leverage LEV Long term debt / Total assets Liquidity LIQ Quick ratio Return on asset ROA Net income / Total assets Dividend per Share DPS Dividend / Outstanding # of shares Tobin's Q TQ Market capitalization / Total assets Capital Unburden CAP_UNB Gross fixed assets / Total assets Variables Symbol Construction Loss Propensity LOSS 1 for -ROA in current and last year, 0 otherwise Industry Type TYP_SEC 1 for financial sector, 0 otherwise Stock Price SP Market value of per share Stock Returns SR Current returns minus previous returns, divided by previous returns 3.