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http://dx.doi.org/10.5392/JKCA.2016.16.03.081

Does Market Performance Influence Credit Risk?  

Lim, Hyoung-Joo (극동대학교 글로벌경영학과)
Mali, Dafydd (경성대학교 회계학과)
Publication Information
The Journal of the Korea Contents Association / v.16, no.3, 2016 , pp. 81-90 More about this Journal
Abstract
This study aims to investigate the association between stock performance and credit ratings, and credit rating changes using a sample of 1,691 KRX firm-years that acquire equity in the form of long-term bonds from 2002 to 2013. Previous U.S. literature is mixed with regard to the relation between credit ratings and stock price. On one hand, there is evidence of a positive relation between credit ratings and stock prices, an anomaly established in U.S. studies. On the other hand, the CAPM model suggests a negative relation between stock prices and credit ratings, implying that investors expect financial rewards for bearing additional risk. To our knowledge, we are the first to examine the relationship between stock price and default risk proxied by credit ratings in period t+1. We find a negative (positive) relation between credit ratings (risk) in period t+1 and stock returns in period t, suggesting that credit rating agencies do not consider stock returns as a metric with the potential to influence default risk. Our results suggest that market participants may prefer firms with higher credit risk because of expected higher returns.
Keywords
Stock Return; Market Performance; Credit Ratings; Credit Rating Changes;
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Times Cited By KSCI : 2  (Citation Analysis)
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