Does the productivity of labour influence credit risk? New evidence from South Korea

Using a sample of 1,666 Korean KRX listed firm observations, we find a positive relation between the productivity of labor in period t and credit ratings in period t + 1, suggesting that firms that use the least amount of input (labor) to achieve output (sales) are considered to have decreasing levels of default risk. After we divide our sample into investment grade and non-investment grade firm samples, the relation changes. We find a consistent relation for the investment grade sample. However, the relation is negative for the non-investment grade suggesting that market participants capture NIG firm’s potential detrimental behavior.