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Korean Academic Society of Business Administration
[ Article ]
korean management review - Vol. 52, No. 2, pp.443-461
ISSN: 1226-1874 (Print)
Print publication date 30 Apr 2023
Received 03 Feb 2023 Accepted 17 Feb 2023
DOI: https://doi.org/10.17287/kmr.2023.52.2.443

신용등급이 기업투자 행동에 미치는 영향

Jun Kyung Auh
(First Author) Yonsei University junkyung.auh@yonsei.ac.kr
Real Effect of Credit Rating


Copyright 2011 THE KOREAN ACADEMIC SOCIETY OF BUSINESS ADMINISTRATION
This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This paper quantifies the causal effect of borrowing cost on firms’ investment decisions. To overcome the empirical challenge due to a possible reverse causality where firms’ investment prospects affect their borrowing costs, I apply an instrumental variable methodology where the identification comes from insurance companies’ regulatory constraints regarding the credit rating of their bond holdings. Rating-based regulatory constraints are more binding for insurers with a weaker capital position. For this reason, bonds upon downgrades face different degrees of selling pressure depending on the different capital positions of their holders. Such differences are presumably not correlated with issuers’ investment prospects. Using data from 2004-2010, I estimate that a one percentage-point increase in bond spread reduces investment during the same year by 12 percent. Moreover, a five percentage-point increase in bond spread halves the probability of new debt issuance.

Keywords:

Credit Rating, Cost of Capital, Risk-Based Capital, Insurance Company, Corporate Bond

Acknowledgments

I thank Andrew Ellul and Pab Jotikasthira for helping on data acquisition. I am also indebted to Charles Jones, Mattia Landoni, Andres Liberman and seminar participants at Columbia University for their helpful comments and suggestions. All errors are our own. Please address correspondence to the authors via email.

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∙ The author Jun Kyung Auh is an assistant professor in finance and artificial intelligence at Yonsei University. He holds Ph.D. in Finance Economics from Columbia University, after he obtains master’s degree in financial mathematics from the same school. After completion of the doctoral degree, he was an assistant professor in finance at Georgetown University. His main research focus is corporate bond, derivatives markets, as well as portfolio theory.