Does Market Performance Influence Credit Risk?

LIM, Hyoung-Joo and MALI, Dafydd (2016). Does Market Performance Influence Credit Risk? The Journal of the Korea Contents Association, 16 (3), 81-90.

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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.

Item Type: Article
Departments - Does NOT include content added after October 2018: Sheffield Business School > Department of Finance, Accountancy and Business Systems
Identification Number:
Page Range: 81-90
Depositing User: Dafydd Mali
Date Deposited: 08 Nov 2018 11:09
Last Modified: 18 Mar 2021 08:19

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