The Determinants of Credit Rating and the Effect of Regulatory Disclosure Requirements: Evidence from an Emerging Market

Kaveri Krishnan; Sankarshan Basu

doi:10.1515/apjri-2021-0027

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The Determinants of Credit Rating and the Effect of Regulatory Disclosure Requirements: Evidence from an Emerging Market

Kaveri Krishnan und Sankarshan Basu

Veröffentlicht/Copyright: 27. Dezember 2022

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Aus der Zeitschrift Asia-Pacific Journal of Risk and Insurance Band 17 Heft 1

Abstract

We examine the determinants of credit rating for the debt instruments of Indian firms. The ordered probit model analysis of firms with rating announcements by CARE, CRISIL, and ICRA, the major rating agencies in India, indicates that interest coverage, profitability, financial leverage, market size, stock beta, and volatility have a significant effect on credit ratings. We find evidence that the credit rating levels have become lower after the market regulator’s passage of Transparency and Disclosure Norms in June 2010. The results suggest that regulatory disclosure requirements influence rating agencies to be conservative in their rating standards.

Keywords: credit rating; regulations; emerging markets

JEL Classification: G24; G28

Corresponding author: Sankarshan Basu, Professor, Finance and Accounting, Indian Institute of Management Bangalore, Bannerghatta Road, Bengaluru, India, E-mail: sankarshan.basu@iimb.ac.in

Appendix A: Long-Term Rating Scale by Different Rating Agencies

Symbols	Rating definition
CARE AAA/CRISIL AAA/ICRA AAA	Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.
CARE AA/CRISIL AA/ICRA AA	Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
CARE A/CRISIL A/ICRA A	Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk.
CARE BBB/CRISIL BBB/ICRA BBB	Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.
CARE BB/CRISIL BB/ICRA BB	Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.
CARE B/CRISIL B/ICRA B	Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.
CARE C/CRISIL C/ICRA C	Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.
CARE D/CRISIL D/ICRA D	Instruments with this rating are in default or are expected to be in default soon.

Rating agencies may apply “+” (plus) or “−” (minus) signs for ratings to reflect comparative standing within the category. (Sources: http://www.careratings.com/resources/rating-resources.aspx; http://www.crisil.com/ratings/credit-rating-scale.html; https://www.icra.in/Rating/CreditRatingScale#Long-Term).

Appendix B: Prediction Probabilities

Variable	Obs	Mean	Std. dev.	Max
Highest	14,360	0.1594	0.2341	1.0000
High	14,360	0.3653	0.2201	0.6529
Adequate	14,360	0.2481	0.1529	0.4450
Moderate	14,360	0.1358	0.1322	0.3602
Risk	14,360	0.0469	0.0648	0.2224
Highrisk	14,360	0.0167	0.0287	0.1279
Default	14,360	0.0278	0.0736	0.9992

This table shows the descriptive statistics of the prediction probabilities from the ordered probit regression model. The variables highest, high, adequate, moderate, risk, highrisk and default corresponds to rating categories AAA, AA, A, BBB, BB, B/C and D respectively.

B.1 Prediction Probabilities for Each Rating Category

Variable	Obs	Mean	Std. dev.	Min	Max
AAA rating code = 1
Highest	2326	0.5195	0.2636	0.0002	0.9921
High	2326	0.4114	0.1930	0.0079	0.6529
Adequate	2326	0.0605	0.0821	0.0000	0.4417
Moderate	2326	0.0075	0.0213	0.0000	0.3602
Risk	2326	0.0008	0.0050	0.0000	0.1717
Highrisk	2326	0.0001	0.0016	0.0000	0.0647
Default	2326	0.0001	0.0020	0.0000	0.0912
AA rating code = 2
Highest	5145	0.1791	0.1823	0.0000	0.9743
High	5145	0.5132	0.1471	0.0000	0.6529
Adequate	5145	0.2247	0.1421	0.0000	0.4450
Moderate	5145	0.0643	0.0817	0.0000	0.3602
Risk	5145	0.0123	0.0254	0.0000	0.2220
Highrisk	5145	0.0030	0.0084	0.0000	0.1188
Default	5145	0.0034	0.0269	0.0000	0.9992
A rating code = 3
Highest	3528	0.0347	0.0666	0.0000	0.7597
High	3528	0.3203	0.1931	0.0000	0.6529
Adequate	3528	0.3568	0.0954	0.0003	0.4450
Moderate	3528	0.1938	0.1133	0.0001	0.3602
Risk	3528	0.0564	0.0534	0.0000	0.2222
Highrisk	3528	0.0171	0.0210	0.0000	0.1279
Default	3528	0.0209	0.0441	0.0000	0.9460
BBB rating code = 4
Highest	2036	0.0125	0.0455	0.0000	1.0000
High	2036	0.1727	0.1681	0.0000	0.6528
Adequate	2036	0.3206	0.1097	0.0000	0.4450
Moderate	2036	0.2713	0.0964	0.0000	0.3602
Risk	2036	0.1117	0.0684	0.0000	0.2224
Highrisk	2036	0.0421	0.0348	0.0000	0.1279
Default	2036	0.0691	0.0909	0.0000	0.8083
BB rating code = 5
Highest	733	0.0101	0.0474	0.0000	0.8349
High	733	0.1289	0.1556	0.0000	0.6529
Adequate	733	0.2759	0.1266	0.0004	0.4450
Moderate	733	0.2787	0.0932	0.0000	0.3602
Risk	733	0.1345	0.0692	0.0000	0.2224
Highrisk	733	0.0565	0.0394	0.0000	0.1279
Default	733	0.1155	0.1392	0.0000	0.9405
B/C rating code = 6
Highest	258	0.0074	0.0239	0.0000	0.1765
High	258	0.1189	0.1619	0.0000	0.6529
Adequate	258	0.2550	0.1257	0.0000	0.4450
Moderate	258	0.2776	0.0954	0.0001	0.3602
Risk	258	0.1428	0.0722	0.0007	0.2224
Highrisk	258	0.0618	0.0408	0.0001	0.1279
Default	258	0.1363	0.1591	0.0000	0.9976
D rating code = 7
Highest	334	0.0058	0.0171	0.0000	0.1240
High	334	0.1221	0.1540	0.0000	0.6418
Adequate	334	0.2610	0.1356	0.0000	0.4450
Moderate	334	0.2709	0.0903	0.0006	0.3602
Risk	334	0.1397	0.0725	0.0019	0.2224
Highrisk	334	0.0618	0.0426	0.0002	0.1279
Default	334	0.1388	0.1584	0.0001	0.9908

Appendix C: Comparison of Variables Before and After the Regulation

Variables	Before	After	Difference	t-Statistic	p-Value
	regulation	regulation	(after–before)
Interest_cover	8.297	9.723	1.426	3.377	0.001
Operating_margin	39.138	33.466	−5.671	−8.659	0.000
Debt_equity	1.901	1.712	−0.189	−1.833	0.067
Beta	0.954	1.172	0.218	28.819	0.000
Stderr_beta	0.115	0.132	0.017	14.792	0.000
Ln_mktcap	9.364	9.811	0.447	10.293	0.000

This table compares the mean of the variables before and after the SEBI regulation. The variables are obtained from Prowess Database.

Appendix D: Rating Levels Before and After SEBI Regulation with Restricted Sample

Variables	Rating code
Dummy	0.622***
	(0.0359)
Interest_cover	−0.00894***
	(0.000964)
Operating_margin	−0.0115***
	(0.000654)
Debt_equity	0.0333***
	(0.00595)
Beta	1.075***
	(0.0582)
Stderr_beta	5.057***
	(0.457)
Ln_mktcap	−0.490***
	(0.0110)
Constant cut1(α ₁)	−4.718***
	(0.127)
Constant cut2(α ₂)	−2.767***
	(0.117)
Constant cut3(α ₃)	−1.566***
	(0.114)
Constant cut4(α ₄)	−0.655***
	(0.115)
Constant cut5(α ₅)	−0.0141
	(0.118)
Constant cut6(α ₆)	0.446***
	(0.125)
Observations	5052

This table shows the ordered probit regression results for numerical rating codes for rating change announcements during the period 2001 to 2011. The dependent variable is the numerical rating code ranging from 1 to 7 (AAA, AA, A, BBB, BB, B/C and D). The dummy variable has a value of one for rating changes after SEBI regulation in June 2010 and zero otherwise. The remaining independent variables are interest coverage ratio, operating margin and debt to equity ratio, beta, standard error of the beta and natural logarithm of the market capitalization. The cut points cut1, cut2, cut3, cut4, cut5, and cut6 are the parameters α ₁, α ₂, α ₃, α ₄, α ₅, and α ₆ of the ordered probit model, which partitions each of the rating categories. Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.

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Received: 2021-10-04

Revised: 2022-07-25

Accepted: 2022-10-06

Published Online: 2022-12-27

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https://doi.org/10.1515/apjri-2021-0027

Schlagwörter für diesen Artikel

credit rating; regulations; emerging markets