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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Article
The Impact of Credit Ratings on Financial Performance (ROA) and Value Creation (Tobin’s Q)
Author(s)
Nazário Augusto de Oliveira, Leonardo Fernando Cruz Basso
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DOI:10.17265/1537-1506/2023.02.004
Affiliation(s)
Mackenzie Presbyterian University (MPU), São Paulo, Brazil
ABSTRACT
This study employs a bibliometric and systematic approach to examine the impact of credit ratings as a measure of financial performance for companies listed in the S&P 500 index. The study identified a knowledge gap as only two researches were found, one suggesting and another using credit ratings to measure financial performance. Most researches use leverage, profitability, liquidity, and Share Return measures to explain financial performance. The empirical analysis uses the data of 2,398 observations of 240 companies rated by S&P Global Ratings for the period 2009-2013, applying a Generalized Method of Moments (GMM) methodology to estimate the models due to its ability to address potential endogeneity issues. The study considers Return on Assets (ROA) and Tobin’s Q as dependent variables. It incorporates credit ratings (CRWLTA) along with variables such as Total Debt to Total Assets (TDTA), Total Shareholder Return (TSR), EBITDA Interest coverage (EBITDAICOV), Quick Ratio (QR), Altman’s Z-Score (AZS), as well as macroeconomic factors like Gross Domestic Product (GDP) growth, inflation (Consumer Price Index—CPI), and the Federal Reserve Interest Rate (FDRI) as independent variables. The study argues that credit ratings, which incorporate historical data and confidential information about companies’ strategies, provide reliable forward-looking creditworthiness assessments to the market. It is supported by specialized rating agencies that employ their methodologies. However, the findings suggested that CRWLTA, had a negative relationship with Q Tobin, although it was not statistically significant, and a negative relationship with ROA that was on the verge of significance.
KEYWORDS
credit ratings, financial performance, risk management
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