Credit ratings and firm value
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DOIhttp://dx.doi.org/10.21511/imfi.17(2).2020.13
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Article InfoVolume 17 2020, Issue #2, pp. 157-168
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A topic of relevance to financial managers is the relation between a credit rating and firm value (VL). The general aim of this paper is to elucidate this relation with a specific objective of helping C corp managers choose an optimal target rating (OTR). To achieve these goals, we use the Capital Structure Model (CSM) to compute a series of firm value (VL) outcomes matched to credit ratings. The maximum VL (max VL), among all VL outcomes, identifies OTR. This identification begins with the matching of credit spreads and ratings by Damodaran (2019) for three firm categories: small, large, and financial service (FS). Given these spreads, we can compute costs of borrowing with these costs needed to compute VL and other numerical outcomes. Besides costs of borrowing, our numerical outcomes are based on other key inputs including US $1,000,000 in before-tax cash flows, C corp tax rates, and a sustainable growth rate. Major findings that guide managers include the following. First, Moody’s A3 is the most common OTR. Second, growth firms generally require higher ranked OTRs. Third, compared to small and large firms, FS firms attain greater max VL values, higher optimal debt-to-firm value ratios (ODVs), and generally lower ranked OTRs. Fourth, relative to small firms, large firms gain less from growth even though they attain greater max VL outcomes. Fifth, only for FS firms can we find outcomes where operational cash flows are better spent on interest payments than retained internally for growth.
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JEL Classification (Paper profile tab)G32, G35
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References32
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Tables2
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Figures2
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- Figure 1. Gain to Leverage (GL) Results for Large Growth Test with Target Credit Rating of A3.
- Figure 2. Firm Value (VL) Mean Outcomes for Five Small Tests, Five Large Tests, and Five FS Tests.
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- Table 1. Costs of Borrowing for Debt and Equity Matched to Credit Ratings
- Table 2. Eleven Outcomes for Fifteen C Corp Tests
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Understanding equity repurchase motives for different firm set-up: Indian evidence
Vandana Bhama
doi: http://dx.doi.org/10.21511/imfi.18(1).2021.08
Investment Management and Financial Innovations Volume 18, 2021 Issue #1 pp. 90-100 Views: 792 Downloads: 322 TO CITE АНОТАЦІЯCorporates express their intention to reward shareholders during repurchase announcements by maximizing their wealth. However, most empirical research finds that stocks’ performance is poor when repurchase announcements are made, and there are no significant abnormal returns. In the Indian context, the present study examines firms’ real intention behind repurchase decisions. The sample comprises 132 firms listed on the Bombay Stock Exchange (BSE) from 2012 to 2018. A Tobit regression model has been used on different firm set-up. The empirical results reveal that low stock valuation is the prominent reason for buybacks among corporates. Firms prefer repurchases to provide abnormal returns to the investors; however, the Indian market does not react much positively to the repurchases, and this might be the reason for less encouraging buybacks in the Indian market. Further, the tender offer is the most preferred mode to open market repurchases. In the case of service firms, undervaluation, low earnings, and low debt ratios are the contributing factors impacting repurchases. Firms with low dividend intend to have more buybacks to reduce their tax burden.
Acknowledgment
The infrastructural support provided by FORE School of Management, New Delhi in completing this paper is gratefully acknowledged. -
The relationship between female workforce participation and corporate bond credit ratings
Yujin Kim ,
Jiyeun Hong
doi: http://dx.doi.org/10.21511/imfi.17(4).2020.04
Investment Management and Financial Innovations Volume 17, 2020 Issue #4 pp. 33-43 Views: 620 Downloads: 97 TO CITE АНОТАЦІЯThe topic of gender diversity in the workforce has received an increasing amount of attention and even resulted in developing a new term, sheconomy, which describes an economy in which women are the main economic players. This study examines the relationship between female workforce participation and corporate bond credit ratings. Using an ordered logit regression model and a sample of listed companies on the Korea Exchange, the results show that the higher the number and proportion of women in the workforce (based on female directors and female employees), the higher the credit rating. However, for chaebol companies, where female directors’ positive role is limited by chaebol owners, a negative (–) moderating effect is observed in the relationship between female workforce participation and credit ratings. Besides, female directors who are members of the owner’s family and were appointed as a means of succession negatively affect a company’s value. The findings contribute to accounting and finance research on the relationship between governance and credit ratings in terms of gender diversity. Policy implications regarding the recent system changes in Korea, including introducing a gender quota system, can be derived from the study.
