Effect of Credit Rating on Firm Performance and Stock Return; Evidence form KSE Listed Firms

Rubina Shaheen and Attiya Javid
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Rubina Shaheen: Pakistan Institute of Development Economics, Islamabad

No 2014:104, PIDE-Working Papers from Pakistan Institute of Development Economics

Abstract: This study investigates the determinants of credit ratings of firms and the impact of credit rating on firms’ performance and stock return for listed firms in Pakistan. For empirical analysis of this study, panel data of 63 financial and nonfinancial firms rated by Pakistan Credit Rating Agency (PACRA) and Karachi Stock Exchange covering period from 2007-2011 is used on the basis of availability of data. The results are obtained by applying two estimation techniques. First, to estimate the determinants of credit rating Ordered Probit approach is used. Second, the generalised method of moments (GMM) technique is applied on panel data to estimate the relationship between credit rating and firm performance and also for credit ratings and stock returns. The results illustrate that firm specific factors (leverage, firm size, profitability, and growth opportunities dividend per share) and corporate governance attributes (board size, block holders, shareholder’s rights and CEO duality) are important factors in predicting firms’ credit rating in Pakistan. The analysis further suggests that firms with higher credit ratings have higher corporate performance and firms with higher credit ratings tend to have higher stock returns. The analysis of this study might facilitate debt holders, investors, shareholders and other stake holders to understand the significance of credit ratings and its influence on performance and stock returns of firms.

Keywords: Credit Ratings; Financial Attributes; Corporate Governance Attributes; Business Conditions; Stock Returns; Ordered Probit Model; PACRA (search for similar items in EconPapers)
JEL-codes: G10 G11 G30 G32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014
New Economics Papers: this item is included in nep-cse and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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