Does market risk predict credit risk? An analysis of firm risk sensitivity, evidence from South Korea

Hyoung-joo Lim and Dafydd Mali

Asia-Pacific Journal of Accounting & Economics, 2018, vol. 25, issue 1-2, 235-252

Abstract: We empirically test the relation between stock volatility (market risk) and credit ratings (credit risk) using KRX listed firms. We find a negative relation between stock volatility and credit ratings. The results suggest that as stock price volatility increases, a firm is more likely to experience a credit rating decrease. After dividing our sample into investment and non-investment grade groups, we find the relation between volatility and a credit rating decrease diminishes in the investment grade sample compared to the non-investment grade sample. Overall, we find investment grade firms are more likely to absorb shocks associated with speculative investment/divestment compared to price sensitive non-investment grade firms.

Date: 2018
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DOI: 10.1080/16081625.2016.1268060

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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