The Influence of Firm Efficiency on Agency Credit Ratings

36 Pages Posted: 21 Mar 2019

See all articles by Dafydd Mali

Dafydd Mali

Sheffield Hallam University - Sheffield Business School

Joon Hyoung Lim

Korea University - School of Public Administration

Date Written: March 19, 2019

Abstract

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.

Keywords: relative efficiency, credit ratings, credit risk, frontier analysis

Suggested Citation

Mali, Dafydd and Lim, Joon Hyoung, The Influence of Firm Efficiency on Agency Credit Ratings (March 19, 2019). Journal of Credit Risk, Vol. 15, No. 1, 2019. Available at SSRN: https://ssrn.com/abstract=3355683

Dafydd Mali (Contact Author)

Sheffield Hallam University - Sheffield Business School ( email )

City Campus
Howard Street
Sheffield, S1 1WB
United Kingdom

Joon Hyoung Lim

Korea University - School of Public Administration ( email )

2511 Sejong-Ro, Jochiwon
Chung-Nam Yeonki-Gun
339-700
Korea, Republic of (South Korea)
82-41-860-1546 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
67
PlumX Metrics