An Inverse Problem Study: Credit Risk Ratings as a Determinant of Corporate Governance and Capital Structure in Emerging Markets: Evidence from Chinese Listed Companies

TL;DR

This study investigates how credit risk ratings influence corporate governance and capital structure decisions in Chinese listed companies, revealing nuanced relationships and highlighting the limited impact compared to other countries.

Contribution

It provides empirical evidence on the relationship between credit ratings, corporate governance, and leverage in Chinese firms, using a unique dataset from 2010 to 2015.

Findings

Credit rating is positively related to outside directors, firm size, tangible assets, and firm age.

Leverage is negatively correlated with board size, profitability, growth, and non-debt tax shields.

Credit rating has a less significant effect on Chinese companies' leverage than in other countries.

Abstract

Credit risk rating is shown to be a relevant determinant in order to estimate good corporate governance and to self-optimize capital structure. The conclusion is argued from a study on a selected (and justified) sample of (182) companies listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange and which use the same Shanghai Brilliance Credit Rating & Investors Service Company assessment criteria, for their credit ratings, from 2010 to 2015. Practically, 3 debt ratios are examined in terms of 11 characteristic variables. Moreover, any relationship between credit rating and corporate governance can be thought to be an interesting finding. The relationship between credit rating and leverage is not as evident as that found by other researchers from different countries; it is significantly positively related to the outside director, firm size, tangible assets and firm age, and CEO and chairman office plurality. However, leverage is found to be negatively correlated with board size, profitability, growth opportunity, and non-debt tax shield. Credit rating is positively associated with leverage, but in a less significant way. CEO-Board chairship duality is insignificantly related to leverage. The non-debt tax shield is significantly correlated with leverage. The correlation coefficient between CEO duality and auditor is positive but weakly significant, but seems not consistent with expectations. Finally, profitability cause could be regarded as an interesting finding. Indeed, there is an inverse correlation between profitability and total debt (Notice that the result supports the pecking order theory). In conclusion, it appears that credit rating has less effect on the so listed large Chinese companies than in other countries. Nevertheless, the perspective of assessing credit risk rating by relevant agencies is indubitably a recommended time dependent leverage determinant.