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Dissertation 7-10-17.pdf (489.76 KB)

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An Examination of the Association of Firm Credit Ratings with Real Activities Manipulation, Audit Quality, Corporate Governance, and Credit Default Swaps

Browning, Logan R
http://rave.ohiolink.edu/etdc/view?acc_num=kent1499696148968389

Abstract Details

2017, PHD, Kent State University, College of Business and Entrepreneurship, Ambassador Crawford / Department of Accounting.
The subprime crisis and subsequent credit crunch that began in late 2007 and early 2008 had crippling effects on the world’s largest economy which led to significant deterioration in the financing ability of all but the most highly rated corporate, municipal, and consumer credit institutions. The credit rating agencies play a vital role in the financing of firms in our economy. The difference of a single rating category can often mean a 100 basis point differential. Thus, even the smallest drop in rating category could cost firms very significant amounts in financing. This illustrates the importance of understanding what information is used as well as what information is not used by credit rating agencies in the credit rating process. This dissertation provides evidence on the association between credit ratings and important firm characteristics documented in the extant literature including real activities manipulation, audit quality, and corporate governance. I also examine whether credit default swaps are associated with these firm characteristics. Main sample results indicate there is a strong, negative association between real activities manipulation and firm credit ratings. Further, results show a positive and significant association of audit quality with ratings. Moreover, main sample testing provides weak evidence of a positive association between corporate governance and firm credit ratings; however, this relationship is limited to governance committee existence. Additionally, main sample results provide evidence of a causal link between real activities manipulation, audit quality, and ratings. Managing real activities through deep price discounts to accelerate timing of sales and overproducing inventory to reduce cost of goods sold are linked to future rating downgrades. Beyond this, higher levels of manipulation in general, are linked to future rating downgrades. Some evidence suggests that, under certain conditions, higher audit quality may lead to future rating downgrades. Results of the investment grade sample analysis are largely consistent with that of the main sample. Evidence from the speculative grade sample suggests, for firms with higher credit risk, that audit quality shares a positive association with firm credit ratings. However, for speculative grade firms, only limited evidence suggests real activities manipulation (namely the abnormal production costs component) is negatively associated with firm credit ratings. Further testing indicates that even though firms with higher audit quality may have higher ratings, they are also more likely to receive future rating downgrades. Speculative grade firms engaging in real activities manipulations are also found to receive future rating downgrades. In small sample analysis, some weak evidence suggests that audit quality and the existence of a governance committee are associated with higher CDS spreads. Results indicate real activities manipulation is not associated with CDS spreads. Moreover, no causal link was established between the variables of interest and CDS spreads. A negative relationship is also documented between CDS spreads and future credit ratings. This evidence of a link between higher (lower) spreads and lower (higher) future ratings is in line with CDS spreads being a signal to ratings agencies prior to rating changes. Yet, this does not provide a direct causal link. No significant relationship is found between CDS spreads and future credit rating changes; thus, no causal link is established. This research may be of interest to academics as well as investors, firms, rating agencies, regulators, and others affected by the credit rating process.
Pervaiz Alam (Committee Chair)
Timothy Miller (Committee Member)
Alfred Guiffrida (Committee Member)
Xiaoling Pu (Committee Member)
148 p.
Accounting
Credit Ratings; Real Activities Manipulation; Audit Quality; Corporate Governance; Credit Default Swaps

Recommended Citations

Citations

  • Browning, L. R. (2017). An Examination of the Association of Firm Credit Ratings with Real Activities Manipulation, Audit Quality, Corporate Governance, and Credit Default Swaps [Doctoral dissertation, Kent State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=kent1499696148968389

    APA Style (7th edition)

  • Browning, Logan. An Examination of the Association of Firm Credit Ratings with Real Activities Manipulation, Audit Quality, Corporate Governance, and Credit Default Swaps. 2017. Kent State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=kent1499696148968389.

    MLA Style (8th edition)

  • Browning, Logan. "An Examination of the Association of Firm Credit Ratings with Real Activities Manipulation, Audit Quality, Corporate Governance, and Credit Default Swaps." Doctoral dissertation, Kent State University, 2017. http://rave.ohiolink.edu/etdc/view?acc_num=kent1499696148968389

    Chicago Manual of Style (17th edition)

kent1499696148968389
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© 2017, all rights reserved.
This open access ETD is published by Kent State University and OhioLINK.