The Credit Rating of Companies Considering Management Factors

Document Type : Research Paper

Authors

1 Ph.D. Candidate in Accounting, Rasht Branch, Islamic Azad University, Rasht, Iran.

2 Assistant Professor of Accounting, Rasht Branch, Islamic Azad University, Rasht, Iran.

Abstract

Objective: Credit rating agencies play an important role in monitoring and disseminating information, and their ability to reduce information asymmetry means they have a unique role in creating value for debt and equity holders. The credit rating is an index that indicates the credit risk (default risk) of a company (debtor) or a specific debt (corporate bonds) and is a measure for determining the costs (interest rate) incurred when using other people's capital in the market; As an important indicator when issuing corporate bonds or borrowing funds, it affects the cash flow and value of the company. A credit rating is important to a company because of its impact on the valuation of stocks and bonds and the legal and contractual costs (benefits) associated with a change in credit rating. Therefore, managers are incentivized to maintain or achieve a favorable credit rating by influencing the rating agencies' perception of the firm's creditworthiness. The existing literature shows that the costs (benefits) associated with credit rating changes affect managerial capital structure decisions and firm financing choices, and firms tend to adjust leverage to influence rating agencies' decisions. However, leverage is not the only important consideration for rating agencies when determining a company's credit rating. On the other hand, the rating process requires analyzing publicly disclosed company information about a company's value. This study investigates how to use management and performance (managers' discretionary disclosure, managers' ability and accounting conservatism) to achieve a favorable credit rating.
Method: The data of 90 companies admitted to the Iran Stock Exchange during the years 2013 to 2023 and a total of 990 annual financial statement reports, explanatory notes and reports of the board of directors' activities to the annual meeting of shareholders were used. Multiple regression methods have used hypotheses based on combined data.
This checklist consists of 60 components for optional disclosure that each item in the checklist if it is disclosed in the annual financial statements, explanatory notes and the report of the general meeting; The number is considered to be one and otherwise zero, and finally, the optional disclosure index is calculated by dividing the sum of disclosed items by the total items that should be disclosed.
Findings The results of the first hypothesis test showed that companies get higher ranks with the increase in managers' discretionary disclosure. It seems that companies tend to commit to the disclosure of credible information to influence the perception of rating agencies. A credible commitment to voluntary disclosure reduces the information asymmetry between inside and outside the firm, resulting in rating agencies' expectations of higher creditworthiness of the firm. Managers appear to use discretionary disclosure to obtain favorable ratings rationally.
Conclusion: The increase in managers' voluntary disclosure may be due to opportunistic motives to obtain a favorable credit rating. An increase in conservatism will lead to a decrease in the manager's opportunistic behavior and a decrease in default risk. Therefore, companies with higher levels of conservatism and higher credit ratings are rewarded with lower debt costs. Rating agencies are likely to consider managers' ability as a signal of lower default risk, given the tendency of managers with higher ability to deliver more limited performance results in the future. By increasing managers' discretionary disclosure, companies get higher ratings. It seems that companies tend to commit to the disclosure of credible information to influence the perception of rating agencies. A credible commitment to voluntary disclosure reduces the information asymmetry between inside and outside the firm, resulting in rating agencies' expectations of higher creditworthiness of the firm. Managers appear to use discretionary disclosure to obtain favorable ratings rationally. Since a significant positive relationship exists between credit rating and discretionary disclosure, companies may have incentives for opportunistic disclosure to obtain a favorable credit rating. The results of this research are consistent with the results of Kim and Ahn (2023) and Hee (2018). Since managers with high ability improve firm performance and information transparency, the idea that managers' ability positively affect credit rating is intuitive. However, it is unclear whether credit rating agencies can accurately measure managers' ability and consider it an independent risk factor because the assessment of managerial ability is subjective and difficult to separate from company performance. The results of the second hypothesis test show a positive and significant relationship between managers' ability and credit rating; companies with more capable managers are more likely to get a higher credit rating. This shows that credit rating agencies recognize managers' ability as an independent credit factor. Hence, rating agencies are likely to consider managers' ability as a signal of lower default risk, given the tendency of managers with higher ability to deliver more limited performance results in the future.
Conservative reporting reduces information asymmetry between debt holders and managers, bondholder and shareholder conflicts, debt costs, and default probability. Therefore, it is considered an important accounting method that validates financial reporting. Therefore, managers can use conservative accounting to influence the credit rating analyst's perception of default risk. The results of the third hypothesis show that conservatism positively and significantly affects credit rating. This result shows that companies with higher conservatism get a higher credit rating. It seems that a company that practices more accounting conservatism reduces default risk by increasing cash holdings, and a company that increases accounting conservatism reduces default risk and agency conflict by increasing efficient investments. Hence, credit markets react to corporate reporting strategies and issue higher credit ratings to companies with lower default risk.

Keywords

Main Subjects

References

احمدوند، میثم؛ رضایی، شعیب و تملکی، حسین (1396). شناسایی و تبیین فاکتورهای تعیین‌کننده رتبه اعتبـاری. مطالعات کاربردی در علوم مدیریت و توسعه، 1، 154-135 http://www.asmd.ir/post.aspx?id=501.
بدیعی، حسین؛ محمودی، محمد و رضازاده، روح الله. (1393). تأثیر محافظه‌کاری مشروط و غیرمشروط بر کیفیت سود با استفاده از مدل باسو، بال و شیواکومار. دانش حسابداری و حسابرسی مدیریت، 3(12)، 32-23 https://jmaak.srbiau.ac.ir/article_7655.html?lang=fa.
پورحیدری، امید و حسین‌پور، حمزه (1391). بررسی رابطه بین افشای اجباری و اختیاری با ارزش سهام شرکت‌ها. چشم‌انداز مدیریت مالی، 2(5)، 28-9 https://jfmp.sbu.ac.ir/article_94513.html.
جعفری کسبی، فرهاد؛ نوزیری، نیلوفر؛ محمدزاده، پروین و شمگانی، رضا (1400). افشای داوطلبانه و هزینه سرمایه: اثر تعدیلی کیفیت کنترل داخلی. حسابداری و فناوری‌های نوین، 1(1و2)، 18-1 https://journals.ut.ac.ir/article_82115.html.
جعفری، سیده محبوبه و احمدوند، میثم (13۹۴). رتبه‌بندی اعتباری شرکت‌های پذیرفته‌شده در بورس اوراق بهادار تهران با استفاده از رویکرد امتیاز نوظهور. اقتصاد و کسب و کار، 10، 5۶-3۷ https://www.sid.ir/paper/510159/fa.
حاجیها، زهره و قربانی، ایوب (1400). تأثیر مسئولیت‌پذیری اجتماعی بر رتبه‌بندی اعتباری شرکت‌ها با توجه به نقش تعدیلی نوسان پایین به بالای بازده سهام. مجله دانش حسابداری، 12(2)، 105-121 DOI: 10.22103/jak.2021.15981.3267.
دارابی، رؤیا و صادقی، مرتضی (1402). بررسی تأثیر معاملات با اشخاص وابسته بر رتبه اعتباری شرکت. قضاوت و تصمیم گیری در حسابداری و حسابرسی، 2(6)، 94-75 https://sanad.iau.ir/journal/jdaa/Article/702089?jid=702089.
رسولخانی، محمدباقر و بولو، قاسم (1403). توانایی مدیریتی و هموارسازی سود. نشریه دانش حسابداری. پذیرفته شده. مجله دانش حسابداری، 15(1)، 1-24 DOI: 10.22103/jak.2023.20986.3848.
رشیدی، محسن (1399). نقش توانایی مدیران در تعدیل شرایط اعتباری و کاهش پراکندگی بازده سهام. مدیریت دارایی و تأمین مالی، 8(3)، 139-123 https://amf.ui.ac.ir/article_24790.html.
فتاحی، یاسین (1402). توانایی مدیریت و اعتبار تجاری: با تأکید بر نقش رتبه‌بندی اعتباری و محدودیت مالی. پژوهش‌های کاربردی در گزارشگری مالی، 12(1)، 126-93 https://www.arfr.ir/article_179324.html.
کیان، علیرضا؛ فقیه، محسن و امیری، مژگان (1399). ارتباط بین محافظه‌کاری حسابداری و خوانایی گزارش‌های مالی در شرکت‌های دولتی. حسابداری دولتی، 7(1)، 144-129 https://gaa.journals.pnu.ac.ir/article_7372.html.
محمودآبادی، حمید و غیوری مقدم، علی (1390). رتبه بندی اعتباری از لحاظ توان مالی پرداخت اصل و فرع بدهی‌ها با استفاده از شیوه تحلیل پوششی داده‌ها. مجله دانش حسابداری، 2(4)، 125-143 DOI: 10.22103/jak.2011.37.
نوری فرد، یداله و بسحاق، ابراهیم (1398). رابطه بین رتبه‌بندی اعتباری شرکت‌ها با دست‌کاری فعالیت‌های واقعی، کیفیت حسابرسی و حاکمیت شرکتی. پژوهش در حسابداری و علوم اقتصادی، 3، 11-22 http://www.jares.ir/post.aspx?id=622.
وظیفه‌دوست، حسین؛ احمدوند، میثم و ساده‌وند، محمدجواد (1395). آزمون تأثیر عوامل حاکمیت شرکتی بر رتبه اعتباری در قالب مدل امتیاز بازار نوظهور (مورد مطالعه: بورس اوراق بهادار تهران). دانش مالی تحلیل اوراق بهادار، 9(30)، 95-113 https://www.sid.ir/paper/200213/fa.
References
Adams, R., Almeida, H., & Ferreira, D. (2005). Powerful CEOs and their impact on corporate performance. Review of Financial Studies, 18, 1403-1432 https://doi.org/10.1093/rfs/hhi030.
Ahmadvand, M., Rezaei, S., & Taveki, H. (2016). Identification and explanation of factors determining credit rating. Monthly Applied Studies in Management and Development Sciences, 1, 135-154 http://www.asmd.ir/post.aspx?id=501 [In Persian].
Ahmed, A.S., Billings, B.K., Morton, R.M., & Stanford-Harris, M. (2002). The role of accounting conservatism in mitigating bondholder–shareholder conflicts over dividend policy and reducing debt costs. The Accounting Review, 77(4), 867–890 https://doi.org/10.2308/accr.2002.77.4.867.
Altman, E.I. (2005). An emerging market credit scoring system for corporate bonds. Emerging Markets Review, 6, 311–323 https://doi.org/10.1016/j.ememar.2005.09.007.
Anderson, R.W., & Carverhill, A. (2012). Corporate liquidity and capital structure. Review of Financial Studies, 25(3), 797-837 https://doi.org/10.1093/rfs/hhr103.
Andreou, P.C., Karasamani, I., Louca, C., & Ehrlich, D. (2017). The impact of managerial ability on crisis-period corporate investment. Journal of Business Research, 79, 107–122 https://doi.org/10.1016/j.jbusres.2017.05.022.
Arianpoor, A., & Yazdanpanah, R. (2023). The impact of management practices and managerial behavioral attributes on credit rating quality. Journal of Asia Business Studies, 17(4), 721-740 DOI: 10.1108/JABS-04-2022-0122.
Badiei, H., Mahmoudi, M., & Rezazadeh, R. (2014). The effect of conditional and unconditional conservatism on earning quality using Basu, Ball, R & Shivakumar models. Journal of Management Accounting and Auditing Knowledge, 3, 23-32 https://jmaak.srbiau.ac.ir/article_7655.html?lang=fa [In Persian].
Baik, B., Farber, D.B., & Lee, S.S. (2011). CEO ability and management earnings forecasts. Contemporary Accounting Research, 28(5), 1645–1668 https://doi.org/10.1111/j.1911-3846.2011.01091.x.
Basu, R., Naughton, J.P., & Wang, C. (2022). The regulatory role of credit ratings and voluntary disclosure. The Accounting Review, 97(2), 25–50 https://doi.org/10.2308/TAR-2018-0286.
Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3-37 https://doi.org/10.1016/S0165-4101(97)00014-1.
Chi, Y.L., & Flynn, S. (2021). The impact of credit rating information on disclosure quality. Financial Management, 1–42 https://doi.org/10.1111/fima.12352.
Cornaggia, K.J., Krishnan, G.V., & Wang, C. (2017). Managerial ability and credit ratings. Contemporary Accounting Research, 34, 2094-2122 https://doi.org/10.1111/1911-3846.12334.
Darabi, R., & Sadeghi, M. (2023). Effects of related party transactions on firms’ credit ratings. Judgment and Decision Making in Accounting and Auditing, 2(6), 75-94 https://sanad.iau.ir/journal/jdaa/Article/702089?jid=702089 [In Persian].
Demerjian, P., Lev, B., & McVay, S. (2012). Quantifying managerial ability: A new measure and validity tests. Management Science, 58(7), 1229–1248 https://doi.org/10.1287/mnsc.1110.1487.
Fattahi, Y. (2023). Managerial ability and trade credit: Emphasizing the role of credit rating and financial constraints. Applied Research in Financial Reporting, 12(1), 93-126 https://www.arfr.ir/article_179324.html [In Persian].
Francis, R., & Martin, X. (2010). Acquisition profitability and timely loss recognition. Journal of Accounting and Economics, 49(1/2), 161–178 https://doi.org/10.1016/j.jacceco.2009.09.003.
Hajiha, Z., & Ghorbani, A. (2021). The effect of social responsibility on the credit rating of companies due to the adjusting role of low to high stock returns. Journal of Accounting Knowledge, 12(2), 105-121 DOI: 10.22103/jak.2021.15981.3267 [In Persian].
Harper, J., Kemper, K.J., & Sun, L. (2019). Managerial ability and bond rating changes. Financial Markets, Institutions & Instruments, 28(5), 381–401 https://doi.org/10.1111/fmii.12123.
He, G. (2018). Credit ratings & managerial voluntary disclosures. The Financial Review, 53(2), 337-378 https://doi.org/10.1111/fire.12149.
Hui, K.W., Klasa, S., & Yeung, P.E. (2012). Corporate suppliers and customers and accounting conservatism, Journal of Accounting and Economics, 53(1-2), 115-135 https://doi.org/10 .1016/j.jacceco. 2011.11.007.
Hyoung Joo, L., & Dafydd, M. (2015). Does conditional conservatism affect credit ratings? An analysis of Korean KRX bond issuers. Korean Corporation Management Review, 22(5), 127-147 https://shura.shu.ac.uk/21960.
Jafari Kasbi, F., Noziri, N., Mohammadzadeh, P., & Shamgani, R. (2021). Voluntary disclosure and cost of capital: The moderating effect of internal control quality. Accounting and New Technologies, 1(1 and 2), 1-18 https://journals.ut.ac.ir/article_82115.html [In Persian]
Jafari, S.M., & Ahmadvand, M. (2015). Credit rating of companies listed on Tehran Stock Exchange using the EMS approach. Journal of Economics & Business Research, 6(10), 37-56 https://www.sid.ir/paper/510159/fa [In Persian]
Kian, A., Faghih, M., & Amiri, M. (2021). The relationship of between accounting conservatism and financial reporting readability in public companies. Governmental Accounting, 7(1), 129-144 https://gaa.journals.pnu.ac.ir/article_ 7372.html [In Persian]
Kim, Y., & An, J. (2021). Voluntary disclosure and rating disagreement among credit rating agencies: Evidence from Korea. Asia-Pacific Journal of Financial Studies, 50, 288–307 https://doi.org/10.1111/ajfs.12341.
Kim, Y., & An, J. (2023). Initial credit ratings and voluntary disclosure: Evidence from Korea. Asia-Pacific Journal of Accounting & Economics, 30(3), 820-832 https://doi.org/10.1080/16081625.2021.1934709.
Kim, Y.R., & Kim, S.M. (2015), Earnings volatility, cash flow volatility, accruals volatility, and split bond ratings, Accounting Information Review, 33, 135–164 https://kiss.kstudy.com/Detail/Ar?key=3369335.
Kisgen, D.J. (2006). Credit ratings and capital structure. Journal of Financ, 61, 1035–1072 https://doi.org/10.1111/ j.1540-6261.2006.00866.x.
Kohansal, S., Rostami, S., & Rostami., Z. (2017). The impact of conditional and unconditional conservatism on trade credit: Evidence of Tehran Stock Exchange. The Audit Financiar Journal, 15(145), 93-102 https://ideas.repec.org/ a/aud/audfin/v15y2017i145p93.html.
La Rosa, F., Liberatore, G., Mazzi, F., & Terzani, S. (2018). The impact of corporate social performance on the cost of debt and access to debt financing for listed European non-financial firms. European Management Journal, 36, 519–529 https://doi.org/10.1016/j.emj.2017.09.007.
Lara, J.M.G., Osma, B.G., & Penalva, F. (2016). Accounting conservatism and firm investment efficiency. Journal of Accounting and Economics, 61(1), 221-238 https://doi.org/10.1016/j.jacceco.2015.07.003.
Lee, W.C., Shen, J., Cheong, T.S., & Wojewodzki, M. (2021). Detecting conficts of interest in credit rating changes: A distribution dynamics approach. Financial Innovation, 7(1), 1–23 https://jfin-swufe.springeropen.com/articles/ 10.1186/s40854-021-00263-z.
Ling Chi, Y., & Flynn, S. (2021). The impact of credit rating information on disclosure quality. Financial Management Association Internationa, 51(1), 73-115 https://doi.org/10.1111/fima.12352.
Livingston, M., & Zhou, L. (2010). Split bond ratings and information opacity premiums, Financial Management, 39, 515–532 https://doi.org/10.1111/j.1755-053X.2010.01082.x.
Mahmoud Abadi, H., & Ghayouri Moghaddam, A. (2011). Credit rating in terms of financial ability to pay the principle and interest on debts, using data envelopment analysis techniques (Case study: Companies listed in Tehran Stock Exchange). Journal of Accounting Knowledge, 2(4), 125-145 DOI: 10.22103/jak.2011.37 [In Persian].
Merriam Webster. (2020). Merriam Webster: https://www.merriam-webster.com/dictionary/credit%20rating.
Murcia, F.C.S., Fernando, D.M., Suliani, R., & José, A.B. (2014). The determinants of credit rating: Brazilian evidence. BAR-Brazilian Administration Review, 11(2), 188-209 https://doi.org/10.1590/S1807-76922014000200005.
Nouri Fard, Y., & Bashaq, I. (2018). The relationship between credit ratings of companies with manipulation of actual activities, audit quality and corporate governance. Research in Accounting and Economic Sciences, 3, 11-22 http://www.jares.ir/post.aspx?id=622 [In Persian].
Oh, H., Park, J., & Kimc, B. (2022). Managerial ability and bond rating: A focus on controlling shareholders’ ownership structure. Emerging Markets Finance and Trade, 58(7), 2093-2107 https://doi.org/10.1080/1540496X.2021.1995349.
Pourheidari, O., & Hosseinpour, H. (2012). Investigating the relationship between mandatory and optional disclosure with the stock value of companies. Financial Management Perspective, 2(5), 9-28 https://jfmp.sbu.ac.ir/ article_94513.html?lang=fa [In Persian].
Rashidi, M. (2020). The role of managers' ability to modify credit conditions and reduce share returns spread. Journal of Asset Management and Financing, 8(3), 123-139 https://amf.ui.ac.ir/article_24790.html [In Persian].
Rasoulkhani, M.B., & Blue, G. (2024). Managerial ability and income smoothing. Journal of Accounting Knowledge, 15(1), 1-24 DOI: 10.22103/jak.2023.20986.3848 [In Persian].
Sahi, C.A.I., Khalid, M., Butt, M.F.T., & Rasheed, A. (2023). Examining the relationship between managerial ability and credit ratings: A case study of USA oil and gas sectors. Audit and Accounting Review, 3(1), 52-77 https://doi.org/10.32350/aar.31.03.
Ting, I.W.K., Tebourbi, I., Lu, W.M., & Kweh, Q.L. (2021). The effects of managerial ability on firm performance and the mediating role of capital structure: Evidence from Taiwan. Financial Innovation, 7, 1-23 https://ideas.repec.org/ a/spr/fininn/v7y2021i1d10.1186_s40854-021-00320-7.html.
Ubarhande, P., & Chandani, A. (2021). Elements of credit rating: a hybrid review and future research Agenda. Cogent Business & Management, 8(1), 1878977 https://doi.org/10.1080/23311975.2021.1878977.
Uhrig-Homburg, M. (2005). Cash-flow shortage as an endogenous bankruptcy reason. Journal of Banking and Finance, 29(6), 1509- 1534 https://doi.org/10.1016/j.jbankfin.2004.06.026.
Vanhaverbeke, S., Balsmeier, B., & Doherr, T. (2024). Mandatory financial information disclosure and credit ratings. Journal of Accounting and Economics, In Press, https://doi.org/10.1016/j.jacceco.2024.101676.
Vazifehdust1, H., Ahmadvand, M., & Sadehvand, M.J. (2016). Examining the effect of corporate governance indicators on credit ratings with regard to the EMS model (Case study: Tehran Stock Exchange). Financial Knowledge of Securities Analysis, 9(30), 95-113 https://www.sid.ir/paper/200213/fa [In Persian].
Verbicki, V. (2024). Corporate credit rating assessment of auga group, Ph.D. Dissertation, Vilniaus universitetas.) https://www.researchgate.net/profile/Valdemar_Verbicki.
Yu, S., Chi, G., & Jiang, X. (2018). Credit rating system for small businesses using the KS test to select an indicator system. Management Decision, 57(1), 229-247‏ https://doi.org/10.1108/MD-06-2017-0553.
Zhang, Y. (2020). Conditional conservatism and trade credit during the global financial crisis. Journal of Accounting and Public Policy, 39(4), 106728 https://doi.org/10.1016/j.jaccpubpol.2020.106728.

Files

History

  • Receive Date: 25 November 2023
  • Revise Date: 06 June 2024
  • Accept Date: 19 June 2024

Share

How to cite

Statistics