The impact of sovereign ratings on euro zone SMEs’ credit rationing

2017 ◽  
Vol 44 (5) ◽  
pp. 745-764 ◽  
Author(s):  
Michael Demoussis ◽  
Konstantinos Drakos ◽  
Nicholas Giannakopoulos
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Debt Crisis ◽  
Relevant Literature ◽  
Credit Rationing ◽  
Firm Level ◽  
Content Type ◽  
Euro Zone ◽  
Sovereign Credit ◽  
The Impact

Purpose The purpose of this paper is to investigate credit rationing across firms in euro zone countries, as it relates to its own sovereign credit ratings. Design/methodology/approach The authors utilize firm-level data from the Survey on Access to Finance of Enterprises for the period 2009-2013 conducted by the European Central Bank. Findings A negative association between the rating of sovereign creditworthiness and credit rationing is identified, while credit rationing varies substantially even among countries with the highest quality of sovereign bonds. Credit rationing is lower in sovereigns with high-quality ratings and higher in sovereigns near default. These results remain intact when fundamental firm characteristics (e.g. firm’s age and size, sector of economic activity, financial situation, etc.) are taken into consideration. This indicates that the interconnection of sovereign debt risk with domestic credit market outcomes is robust. Originality/value The present study contributes to the relevant literature by performing a detailed analysis of credit rationing for euro zone SMEs and by exploring the link between sovereign credit rating and credit rationing during the sovereign debt crisis period.

Regulation of uncovered sovereign credit default swaps – evidence from the European Union

2015 ◽  
Vol 16 (4) ◽  
pp. 425-443 ◽  
Author(s):  
Florian Kiesel ◽  
Felix Lücke ◽  
Dirk Schiereck
Keyword(s):  
European Union ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Credit Default Swap ◽  
The European Union ◽  
Content Type ◽  
Sovereign Credit ◽  
Credit Default ◽  
The Impact ◽  
The Eu

Purpose – This study aims to analyze the impact and effectiveness of the regulation on the European sovereign Credit Default Swap (CDS) market. The European sovereign debt crisis has drawn considerable attention to the CDS market. CDS have the ability of a speculative instrument to bet against a sovereign default. Therefore, the Regulation (EU) No. 236/2012 was introduced as the worldwide first uncovered CDS regulation. It prohibits buying uncovered sovereign CDS contracts in the European Union (EU). Design/methodology/approach – First, this paper measures spread changes of sovereign CDS of the EU member states around regulation specific event dates to detect whether and when European sovereign CDS reacts to regulation announcements and the enforcement of regulation. Second, it compares the CDS long-term stability of the EU sample with a non-EU sample based on 44 non-EU sovereign CDS entities. Findings – The results indicate widening CDS spreads prior to the regulation, and stable CDS spreads following the introduction of the regulation. In particular, sovereign CDS of European crisis-hit entities are stable since the regulation was introduced. Originality/value – The results show that since the regulation of uncovered CDS in the EU has been enacted, the sovereign CDS market is stable and less volatile. Based on the theory about speculation on uncovered sovereign CDS by betting on the reference entity’s default, the introduction of Regulation (EU) No. 236/2012 appears to be an appropriate measure to stabilize markets and reduce speculation on sovereign defaults.

Assessing sovereign risk: the case of rich countries

2014 ◽  
Vol 6 (3) ◽  
pp. 212-225 ◽  
Author(s):  
Norbert Gaillard
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Debt Crisis ◽  
Sovereign Debt Crisis ◽  
Bond Yields ◽  
Content Type ◽  
The Great Recession ◽  
Market Participants ◽  
Investment Grade ◽  
Rich Countries

Purpose – This paper aims to shed new light on the inability of credit rating agencies (CRAs) to forecast the recent defaults and so-called quasi-defaults of rich countries. It also describes how Moody’s sovereign rating methodology has been modified – and could be further improved – to solve this problem. Design/methodology/approach – After converting bond yields into yield-implied ratings, accuracy ratios are computed to compare the respective performances of CRAs and market participants. Then Iceland’s and Greece’s ratings at the beginning of the Great Recession are estimated while accounting for the parameters included in the new methodology implemented by Moody’s in 2013. Findings – Market participants outperformed Moody’s and Standard & Poor’s in terms of anticipating the sovereign debt crisis that hit several European countries starting in 2008. However, the new methodology implemented by Moody’s should lead to more conservative and accurate sovereign ratings. Originality/value – The chronic inability of CRAs to anticipate public debt crises in rich countries is dangerous because the countries affected – which are generally rated in the investment-grade category – are substantially downgraded, amplifying the sovereign debt crisis. This study is the first to demonstrate that Moody’s has learned from its recent failures. In addition, it recommends ways to detect serious threats to the creditworthiness of high-income countries.

Venture capital and the financial crisis in Portugal: the VC managers’ viewpoint

2016 ◽  
Vol 23 (4) ◽  
pp. 1032-1056 ◽  
Author(s):  
Carlos Cabral-Cardoso ◽  
Maria Céu Cortez ◽  
Luísa Lopes
Keyword(s):  
Venture Capital ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Dynamic Environment ◽  
Small Dimension ◽  
Control Mechanisms ◽  
Structured Interviews ◽  
Cumulative Impact ◽  
Content Type ◽  
The Impact

Purpose The purpose of this paper is to examine, from the venture capital (VC) managers’ perspective, the impact of the international financial and sovereign debt crises on the VC industry in Portugal, and the changes and adjustments VC managers were forced to adopt to their procedures and current practices to cope with these challenges. Design/methodology/approach A two-step research design was adopted to best capture the dynamics of the crisis. Data were collected through in-depth semi-structured interviews and content analysed. The initial set of interviews with ten VC managers was conducted in 2011, immediately before the country bailout; and the second set in 2013, when the full impact of the debt crisis was being felt. Findings The study shows that the crises had a significant impact on the VC industry producing a complex and dynamic environment with high levels of uncertainty. The VC managers’ contradictory perceptions reflect their own struggle to figure out the best way to deal with the pressures in such a volatile environment where new opportunities may also arise. In general, VC firms became more selective adopting a more prudential attitude and tighter control mechanisms. Originality/value This study contributes to the field by analysing, from the VC managers’ perspective, the cumulative impact of the international financial and sovereign debt crisis on a European VC market with specific features: small dimension of the industry operating in a bank-centred capital market and where family-owned SMEs predominate.

Goodwill impairment loss and bond credit rating

2017 ◽  
Vol 25 (1) ◽  
pp. 2-20 ◽  
Author(s):  
Li Sun ◽  
Joseph H. Zhang
Keyword(s):  
Regression Analysis ◽  
Credit Rating ◽  
Credit Ratings ◽  
Negative Relationship ◽  
Least Squares Regression ◽  
Firm Level ◽  
Content Type ◽  
Goodwill Impairment ◽  
The Impact ◽  
The Relationship

Purpose The purpose of this study is to examine the impact of goodwill impairment losses on bond credit ratings. Design/methodology/approach The authors use regression analysis to examine the relationship between goodwill impairment losses and bond credit ratings. Findings The empirical results show a negative relationship between the amount of goodwill impairment losses and bond credit ratings, suggesting that firms with goodwill impairment losses receive lower credit ratings. The authors perform various additional tests, including subsamples in good or bad market time, changes analysis, first time goodwill impairment firms vs subsequent impairment and the two-stage least squares regression analysis to address potential endogeneity issues. The main results persist. Originality/value This paper links and contributes to two streams of literature: goodwill impairment in accounting literature and bond credit ratings in finance literature. Whether a firm’s goodwill impairment losses affect the firm’s bond credit rating remains an interesting question that has not been examined previously. To the best of the authors’ knowledge, this is the first study that directly examines the relationship between goodwill impairment losses and bond ratings at the firm level.

scholarly journals Stock Market Reactions To Sovereign Credit Rating Changes: Evidence From Four European Countries

2014 ◽  
Vol 30 (3) ◽  
pp. 953 ◽  
Author(s):  
Ibrahim Fatnassi ◽  
Zied Ftiti ◽  
Habib Hasnaoui
Keyword(s):  
Sovereign Debt ◽  
Credit Rating ◽  
Debt Crisis ◽  
Regression Equations ◽  
Market Reactions ◽  
Rating Agencies ◽  
Sovereign Credit ◽  
Rating Changes ◽  
Stock Market Reactions ◽  
Sovereign Credit Rating

We analyze the reactions of the returns of four European stock markets to sovereign credit rating changes by Fitch, Moodys, and Standard and Poors (S&P) during the period from June 2008 to June 2012 using panel regression equations. We find that (i) upgrades and downgrades affect both own country returns and other countries returns, (ii) market reactions to foreign downgrades are stronger during the sovereign debt crisis period, and (iii) negative news from rating agencies are more informative than positive news.

Do sovereign credit rating announcements influence excess bond and equity returns in Africa?

2018 ◽  
Vol 13 (6) ◽  
pp. 1522-1537 ◽  
Author(s):  
Misheck Mutize ◽  
Sean Joss Gossel
Keyword(s):  
Financial Markets ◽  
Information Exchange ◽  
Sovereign Debt ◽  
Credit Rating ◽  
Relevant Information ◽  
African Countries ◽  
Content Type ◽  
Sovereign Credit ◽  
Study Techniques ◽  
Sovereign Credit Rating

Purpose The purpose of this paper is to examine whether new sovereign credit rating (SCR) changes are valuable, and relevant information is provided to bond and equity markets in 30 African countries that received an SCR during the period 1994–2014. Design/methodology/approach This study applies a combination of GARCH models and event study techniques. Findings This study shows that the financial markets do not significantly react to SCR announcements, possibly because these African markets are already perceived to be risky. Research limitations/implications At last, a significant portion of Africa’s sovereign debt is held by foreign investors (Arslanalp and Tsuda, 2014) who commonly preclude asset managers from investing in low SCR grades. Thus, an unfavorable SCR announcement could lead to a withdrawal of these funds, which could significantly alter both fiscal and monetary policies in the economy. Practical implications SCRs is immaterial to investors holding African securities. Social implications Although financial markets are weakly responsive to SCR announcements, they appear to be informationally important in the operation of stocks and bond markets in Africa. Therefore, governments should appreciate the long-term information exchange between investors and borrowers, and the consequential nature of credit ratings in Africa’s nascent financial markets in order to proactively manage the risks of negative ratings. Originality/value Studies on credit rating effects on Africa markets are rare.

scholarly journals The impact of credit ratings on capital structure

2019 ◽  
Vol 11 (2) ◽  
pp. 226-245
Author(s):  
Bora Aktan ◽  
Şaban Çelik ◽  
Yomna Abdulla ◽  
Naser Alshakhoori
Keyword(s):  
Capital Structure ◽  
Credit Rating ◽  
Stock Exchange ◽  
Debt Crisis ◽  
Credit Ratings ◽  
Research Result ◽  
Small Sample ◽  
Linear Regression Models ◽  
Content Type ◽  
The Impact

Purpose The purpose of this paper is to empirically investigate the effect of real credit ratings change on capital structure decisions. Design/methodology/approach The study uses three models to examine the impact of credit rating on capital structure decisions within the framework of credit rating-capital structure hypotheses (broad rating, notch rating and investment or speculative grade). These hypotheses are tested by multiple linear regression models. Findings The results demonstrate that firms issue less net debt relative to equity post a change in the broad credit ratings level (e.g. a change from A- to BBB+). The findings also show that firms are less concerned by notch ratings change as long the firms remain the same broad credit rating level. Moreover, the paper indicates that firms issue less net debt relative to equity after an upgrade to investment grade. Research limitations/implications The study covers the periods of 2009 to 2016; therefore, the research result may be affected by the period specific events such as the European debt crisis. Moreover, studying listed non-financial firms only in the Tadawul Stock Exchange has resulted in small sample which may not be adequate enough to reach concrete generalization. Despite the close proximity between the GCC countries, there could be jurisdictional difference due to country specific regulations, policies or financial development. Therefore, it will be interesting to conduct a cross country study on the GCC to see if the conclusions can be generalized to the region. Originality/value The paper contributes to the literature by testing previous researches on new context (Kingdom of Saudi Arabia, KSA) which lack sophisticated comparable studies to the one conducted on other regions of the world. The results highlight the importance of credit ratings for the decision makers who are required to make essential decisions in areas such as financing, structuring or operating firms and regulating markets. To the best of the authors’ knowledge, this is the first study of its kind that has been applied on the GCC region.

scholarly journals Location of banks and their credit ratings

2015 ◽  
Vol 16 (3) ◽  
pp. 220-232 ◽  
Author(s):  
Eric van Loon ◽  
Jakob de Haan
Keyword(s):  
Monetary Union ◽  
Euro Area ◽  
Sovereign Debt ◽  
Banking Sector ◽  
Credit Rating ◽  
Debt Crisis ◽  
Credit Ratings ◽  
External Support ◽  
Present Evidence ◽  
Content Type

Purpose – This paper aims to examine whether credit ratings of banks are related to their location, i.e. inside or outside the Euro Area. Design/methodology/approach – The authors estimate a multilevel ordered probit model for banks’ credit ratings in 2011 and control for bank-specific factors. They use the overall ratings and the external support ratings provided by Fitch as the dependent variable. Findings – Banks located in Euro Area member countries, on average, receive a higher credit rating from Fitch than banks located outside the Euro Area. Evidence for a “too-big-to-fail” and a “too-big-to-rescue” effect was also found. Research limitations/implications – The monetary union effect on banks’ credit ratings may be affected by the period under investigation. The ratings refer to August 2011, when the European sovereign debt crisis was at its height. This implies that, if anything, the Economic and Monetary Union (EMU) effect is underestimated. Practical implications – Large banks in the Euro Area receive higher credit ratings, so they have a competitive advantage over small banks located outside the Euro Area. Social implications – The present evidence suggests that small European countries with an extensive banking sector will be better off if they are member of the European EMU. Originality/value – The relationship between location of banks and their credit ratings has hardly been researched before. The present evidence is directly related to a debate in the literature on this issue.

Trade credit in times of crisis: evidence from European SMEs

2018 ◽  
Vol 25 (2) ◽  
pp. 277-293 ◽  
Author(s):  
Candida Bussoli ◽  
Francesca Marino
Keyword(s):  
Financial Crisis ◽  
Sovereign Debt ◽  
Trade Credit ◽  
Debt Crisis ◽  
Sovereign Debt Crisis ◽  
Content Type ◽  
Accounts Payable ◽  
Before And After ◽  
Credit Channels ◽  
The Impact

Purpose The purpose of this paper is to investigate the use of trade credit in a sample of small and medium enterprises in Europe, before and after the outbreak of the subprime financial crisis and the sovereign debt crisis (2006-2013). This study aims to verify whether trade credit is an alternative source of funding compared to other sources of financing. In addition, it tests whether firms that grant extended payment terms to their customers demand delayed accounts payable terms from their suppliers. Design/methodology/approach The empirical analysis is conducted on a sample of European SMEs that were observed over the period immediately before and after the outbreak of the subprime crisis (2008) and the sovereign debt crisis (2010-2011). A panel data analysis is conducted using the generalized method of moment. Findings The results suggest that SMEs with a high probability of insolvency use trade credit more extensively. Distressed and weaker SMEs are less able to match accounts receivable to accounts payable. Finally, the evidence suggests that during the financial crises, the substitution hypothesis is weakened and liquidity shocks are propagated through trade credit channels. Originality/value This study contributes to the extant literature as very few studies have analyzed intercompany financing for European SMEs during periods of financial crisis. The results suggest that supporting trade credit channels, through timely injections of liquidity to companies, could reduce the impact of both financial and intercompany credit crunch on SMEs.

Sign in / Sign up

Export Citation Format

Share Document