scholarly journals Relationship Between Audit Opinion And Credit Rating: Evidence From Korea

2016 ◽  
Vol 32 (2) ◽  
pp. 621 ◽  
Author(s):  
Myungki Cha ◽  
Kookjae Hwang ◽  
Youngjun Yeo
Keyword(s):  
Credit Rating ◽  
Empirical Test ◽  
Credit Ratings ◽  
Audit Opinion ◽  
Credit Score ◽  
Audit System ◽  
High Profile ◽  
Predictive Function ◽  
Audit Opinions ◽  
The Relationship

In this study, we investigate the relationship between credit ratings and audit opinions of financially distressed companies impending bankruptcy. Using Korean publicly-held firms for the years 2007 through 2014, we analyze 97 bankrupt companies with credit rating available before they file bankruptcy. Following prior research (Geiger et al., 2005), we find that the propensity to issue a going concern audit opinion is associated with the credit score issued by NICE immediately prior to the audit opinion date. We also compare credit ratings to audit opinions to investigate which of the two is more conservative and provides the earlier signal of bankruptcy. Through empirical test, we can conclude that audit system has more successfully predictive function in signaling preceding bankruptcy than CRAs' system with overly optimism. We argue that after a string of high-profile corporate failures such as Enron and Arthur Anderson’s bankruptcies, legislators portrayed auditors negatively and ultimately led to the enactment and more forced liabilities and thus auditors become more conservative. To remedy CRAs' failure by providing overly optimism, we suggest that like as auditors, CRAs' regulations should be more strengthened on their liability about issuing credit ratings.

Credit ratings and audit opinion: evidence from Tunisia

2019 ◽  
Vol 9 (1) ◽  
pp. 103-125 ◽  
Author(s):  
Hanen Moalla ◽  
Rahma Baili
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Developed Countries ◽  
Short Term ◽  
Content Type ◽  
Audit Opinion ◽  
Going Concern Opinion ◽  
To Receive ◽  
The Relationship

Purpose The purpose of this paper is to examine whether credit ratings issued by Fitch predict auditor’s opinion for the Tunisian financial companies. It studies the association between Fitch’s credit rating and the audit opinion. Design/methodology/approach The whole population was analyzed. It is composed of 35 banks, leasing companies and factoring companies in Tunisia. The hand-collected data over 11 years (2005–2015) were used and a multiple-ordered logistic regression was performed. Findings The findings show that firms with a high short-term grade, a high long-term grade or a positive outlook are more likely to receive an unqualified audit opinion. In addition, companies with a stable outlook are more likely to receive an explanatory paragraph, a qualification or a going-concern opinion. Originality/value Studies examining the relationship between credit ratings and audit opinion are rare. This piece of research adds to knowledge about the relationship between different components of agency ratings and the auditor’s opinion in a developing country. Previous studies have investigated the case of developed countries and have been interested in the only impact of the long-term credit rating. This study analyzes three components of credit rating, namely long-term credit rating, short-term credit rating and rating outlook. In addition, it sheds light on the effect of various rating grades issued by rating agencies on the audit opinion. It gives a broader view of the relationship between credit ratings and audit opinion.

scholarly journals Does a Manager Respond to a Going-Concern Audit Opinion with an Asymmetry in Gain and Loss?

2021 ◽  
Vol 13 (8) ◽  
pp. 4425
Author(s):  
Taewoo Kim
Keyword(s):  
Time Series ◽  
Accounting Conservatism ◽  
Timely Manner ◽  
Audit Opinion ◽  
Going Concern ◽  
Asymmetric Timeliness ◽  
Gain And Loss ◽  
Audit Opinions ◽  
The Relationship

In this paper, I investigate the relationship between previous going-concern audit opinions and subsequent asymmetric timeliness in accounting. Using the time-series and price-based models and conservatism proxy, I find that firms with going-concern audit opinions subsequently report losses in a more timely manner than firms that did not receive going-concern audit opinions. Furthermore, I also find that firms exiting going-concern audit opinions are more likely to report losses rather than gains in a timely manner, compared to firms non-exiting from going-concern opinions. This study extends the prior research by exploring the association between going-concern opinions and accounting conservatism from the perspective of client firms—that is, how firms behave strategically and conservatively to bypass going-concern opinions, once the firms had received previous going-concern opinions.

scholarly journals ESG Scores and the Credit Market

2020 ◽  
Vol 12 (8) ◽  
pp. 3456 ◽  
Author(s):  
Ga-Young Jang ◽  
Hyoung-Goo Kang ◽  
Ju-Yeong Lee ◽  
Kyounghun Bae
Keyword(s):  
Small Firms ◽  
Credit Rating ◽  
Credit Ratings ◽  
Debt Financing ◽  
Corporate Bond ◽  
Cost Of Debt ◽  
Rating Agencies ◽  
Bond Returns ◽  
The Cost ◽  
The Relationship

This study analyzes the relationship between Environmental, Social and Governance (ESG) scores and bond returns using the corporate bond data in Korea during the period of 2010 to 2015. We find that ESG scores include valuable information about the downside risk of firms. This effect is particularly salient for the firms with high information asymmetry such as small firms. Interestingly, of the three ESG criteria, only environmental scores show a significant impact on bond returns when interacted with the firm size, suggesting that high environmental scores lower the cost of debt financing for small firms. Finally, ESG is complementary to credit ratings in assessing credit quality as credit ratings cannot explain away ESG effects in predicting future bond returns. This result suggests that credit rating agencies should either integrate ESG scores into their current rating process or produce separate ESG scores which bond investors integrate with the existing credit ratings by themselves.

The moderating role of audit quality on the relationship between auditor reporting and earnings management: empirical evidence from Tunisia

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Fakhfakh Imen ◽  
Jarboui Anis
Keyword(s):  
Earnings Management ◽  
Audit Quality ◽  
Stock Exchange ◽  
Generalized Least Squares ◽  
Content Type ◽  
Audit Opinion ◽  
Before And After ◽  
Audit Opinions ◽  
Auditor Reporting ◽  
The Relationship

PurposeThe purpose of this study is to examine the interrelationship between modified audit opinions and earnings management as measured by discretionary accruals and develop a thorough understanding regarding the moderating effect of audit quality on this relation.Design/methodology/approachThis study uses a sample of Tunisian listed firms on the Tunis Stock Exchange during 2006–2013. Four models are developed and tested by using panel logistic and Feasible Generalized Least Squares (FGLS) regressions.FindingsThe results show that earnings management increases the likelihood of receiving a modified audit opinions. Then firms receiving modified audit opinions manage earnings more than those receiving clean opinions. It is also discovered that audit quality moderates the relationship between audit opinion and earnings management.Practical implicationsThis paper contributes to the literature of both audit and management studies and represents the first effort to examine the relation between audit opinion and earnings management, with audit quality as a moderating variable.Originality/valueThis study extends existing research on earnings management and audit opinion. Thus, this study has the potential to help stakeholders, board of directors, regulators and auditors, who are related with enhancing the supervision of firms and reducing the opportunities given to managers, to engage in earnings management. It constitutes an addition to previous knowledge about audit opinion in the Tunisian context before and after revolution.

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 Determining the Credit Score and Credit Rating of Firms using the Combination of KMV-Merton Model and Financial Ratios

2021 ◽  
Vol 6 (3) ◽  
pp. 105-112
Author(s):  
Norliza Muhamad Yusof ◽  
Iman Qamalia Alias ◽  
Ainee Jahirah Md Kassim ◽  
Farah Liyana Natasha Mohd Zaidi
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Scoring ◽  
Financial Ratios ◽  
Credit Score ◽  
Merton Model ◽  
Medium Level ◽  
Credit Scores ◽  
Risk Managers

Credit risk management has become a must in this era due to the increase in the number of businesses defaulting. Building upon the legacy of Kealhofer, McQuown, and Vasicek (KMV), a mathematical model is introduced based on Merton model called KMV-Merton model to predict the credit risk of firms. The KMV-Merton model is commonly used in previous default studies but is said to be lacking in necessary detail. Hence, this study aims to combine the KMV-Merton model with the financial ratios to determine the firms’ credit scores and ratings. Based on the sample data of four firms, the KMV-Merton model is used to estimate the default probabilities. The data is also used to estimate the firms’ liquidity, solvency, indebtedness, return on asset (ROA), and interest coverage. According to the weightages established in this analysis, scores were assigned based on those estimates to calculate the total credit score. The firms were then given a rating based on their respective credit score. The credit ratings are compared to the real credit ratings rated by Malaysian Rating Corporation Berhad (MARC). According to the comparison, three of the four companies have credit scores that are comparable to MARC’s. Two A-rated firms and one D-rated firm have the same ratings. The other receives a C instead of a B. This shows that the credit scoring technique used can grade the low and the high credit risk firms, but not strictly for a firm with a medium level of credit risk. Although research on credit scoring have been done previously, the combination of KMV-Merton model and financial ratios in one credit scoring model based on the calculated weightages gives new branch to the current studies. In practice, this study aids risk managers, bankers, and investors in making wise decisions through a smooth and persuasive process of monitoring firms’ credit risk.

Credit risk signals in CDS market vs agency ratings

2016 ◽  
Vol 17 (2) ◽  
pp. 194-217 ◽  
Author(s):  
Michael Jacobs Jr ◽  
Ahmet K. Karagozoglu ◽  
Dina Naples Layish
Keyword(s):  
Credit Risk ◽  
Credit Rating ◽  
Credit Ratings ◽  
Credit Default Swap ◽  
Risk Assessments ◽  
Content Type ◽  
Rating Agencies ◽  
Market Participants ◽  
Credit Default ◽  
The Relationship

Purpose This research aims to model the relationship between the credit risk signals in the credit default swap (CDS) market and agency credit ratings, and determines the factors that help explain the variation in such signals. Design/methodology/approach A comprehensive analysis of the differences in the relative credit risk assessments of CDS-based risk signals and agency ratings is provided. It is shown that the divergence between credit risk signals in the CDS market and agency ratings is explained by factors which the rating agencies may consider differently than credit market participants. Findings The results suggest that agency credit ratings of relative riskiness of a reference entity do not always correspond with assessments by CDS spreads, as the price of risk is a function of additional macro and micro factors that can be explained using statistical analysis. Originality/value This research is unique in modeling the relationship between the credit risk assessments of the CDS market and the agency ratings, which to the best of the authors' knowledge has not been analyzed before in terms of their agreement and the level of discrepancy between them. This model can be used by investors in debt instruments that are not explicitly CDSs or which have illiquid CDS contracts, to replicate market-based, point-in-time credit risk signals. Based on both market-based and firm-specific factors in this model, the results can be used to augment through-the-cycle credit risk assessments, analyze issues surrounding the pricing of CDSs and examine the policies of credit rating agencies.

Investors’ Expectations of the Improvement in the Credibility of Audit Opinions following PCAOB Inspection Reports with Identified Deficiencies

2010 ◽  
Vol 10 (1) ◽  
pp. 36-56 ◽  
Author(s):  
Jesse C. Robertson ◽  
Richard W. Houston
Keyword(s):  
Public Confidence ◽  
Audit Opinion ◽  
Outreach Programs ◽  
High Profile ◽  
Perceived Credibility ◽  
Sarbanes Oxley ◽  
Accounting Scandals ◽  
Audit Firms ◽  
Public Company ◽  
Audit Opinions

ABSTRACT: Following high-profile accounting scandals (e.g., Enron), Congress passed the Sarbanes-Oxley Act, which established the Public Company Accounting Oversight Board (PCAOB). The PCAOB conducts regular inspections of audit firms and issues inspection reports that describe audit deficiencies identified during the inspections. One purpose of these reports is to improve public confidence in auditor credibility. We conduct a between-subjects experiment to provide initial evidence concerning investors’ perceptions of audit opinion credibility following PCAOB inspections. While we find an overall increase in perceptions of the credibility of future audit opinions, the degree to which perceptions increase is a function of three salient characteristics of PCAOB reports. Specifically, we find that investors anticipate more (less) improvement in the credibility of future opinions when: (1) inspections contain high (low) severity deficiencies; (2) firms respond to the reports with concessions (denials); and (3) for small (large) firms. Further, investors’ assessment of the credibility of the firm’s response to the PCAOB report is higher for concessions than denials; response credibility fully mediates the effect of response type (concession or denial) on the perceived improvement in the credibility of future opinions. Therefore, the inspections may be a useful tool for improving the perceived credibility of audit opinions under certain conditions. Implications include the possibility that firms should consider carefully the nature of their responses and the PCAOB should consider establishing outreach programs to investors to educate them about its regulatory role.

OPTIMAL CREDIT RATINGS

2008 ◽  
Vol 11 (02) ◽  
pp. 225-247 ◽  
Author(s):  
SEBASTIAN HERZOG ◽  
CHRISTIAN KOZIOL ◽  
TIM THABE
Keyword(s):  
Firm Size ◽  
Structural Model ◽  
Credit Rating ◽  
Empirical Test ◽  
Credit Ratings ◽  
Default Probability ◽  
Bankruptcy Costs ◽  
Interest Payments

In this paper, we show that an individual optimal credit rating exists for firms and empirically test whether firms strive to achieve their optimal rating. For this purpose, we consider the structural model by Leland [12], which balances the benefits of debt in the form of the tax-deductibility of interest payments against bankruptcy costs in order to obtain the optimal rating. Testable implications for both firms which have implemented their optimal rating and firms with non-optimal ratings are deduced. An empirical test with 420 firms contained in the S&P 500 Index indicates that all factors which theoretically drive optimal ratings also affect the observed rating in the predicted way. In line with our theory, observed ratings can be considerably better explained if, in addition to the traditional factors such as leverage and firm size, a proxy for bankruptcy costs and the default probability related to the optimal rating is considered. These findings suggest that U.S. firms contained in the S&P 500 Index strive to achieve their optimal credit ratings.

scholarly journals The relationship between female workforce participation and corporate bond credit ratings

2020 ◽  
Vol 17 (4) ◽  
pp. 33-43
Author(s):  
Yujin Kim ◽  
Jiyeun Hong
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Gender Diversity ◽  
Policy Implications ◽  
Corporate Bond ◽  
Quota System ◽  
Workforce Participation ◽  
Positive Role ◽  
Female Directors ◽  
The Relationship

The 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.

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