The influence of firm efficiency on agency credit ratings

Mali, Dafydd; Lim, Hyoungjoo

doi:10.21314/jcr.2018.242

Cited by 14 publications

(22 citation statements)

References 34 publications

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“…There is evidence that rating agencies provide higher credit ratings to firms with higher relative efficiency, implying RFE is a specific form of information that can be used as an indicator of whether a firm is likely to survive a business cycle (Lim & Mali, 2019). Mali and Lim (2021) demonstrate that audit clients (firms) are incentivised to signal operational performance (RFE) is genuine by securing increasing audit effort.…”

Section: Introductionmentioning

confidence: 99%

Does relative (absolute) efficiency affect capital costs?

Mali

Lim

2021

Ann Oper Res

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In this paper, we examine the effect of relative/absolute firm efficiency on weighted average cost of capital (WACC). Using a sample of Korean listed firms, we find that WACC is negatively associated with relative firm efficiency (operational performance) suggesting that firms with higher (lower) relatively efficiency are expected to pay lower (higher) capital costs. When we repeat our analysis using absolute firm efficiency (ROA), we do not find a statistically significant relationship. Our results suggest relative efficiency which is estimated as output (sales) divided by the resources that are directly under the control of management is assessed by capital providers and impounded into a firm’s capital costs. Absolute efficiency (ROA) which is estimated as sales divided by total assets is not. Our results suggest that simple accounting ratios used in the accounting literature are not considered as informative to explain borrowing costs compared to relative efficiency that captures managerial operational performance.

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Section: Introductionmentioning

confidence: 99%

Does relative (absolute) efficiency affect capital costs?

Mali

Lim

2021

Ann Oper Res

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“…However, relative efficiency captures the efficiency of each firm within an industry using resources and costs specific to the industry, and then with the market as a whole. Based on evidence that credit rating agencies reward firms with higher relative efficiency (not absolute efficiency) with higher credit ratings (Mali and Lim 2019), we conjecture that market participants are aware of the difference of book value (absolute) efficiency and relative firm efficiency, and have the sophistication to capture both types of efficiency.…”

Section: Previous Literature and Hypothesesmentioning

confidence: 99%

“…2006; Kisgen 2006). Therefore, based on evidence that credit‐rating agencies interpret relative efficiency as a default risk determinant (Mali and Lim 2019), NIG/IG firms are likely to have different incentives to legitimise relative efficiency performance. IG firms have an incentive to protect their rating levels by demonstrating audit quality.…”

Section: Additional Analysismentioning

confidence: 99%

“…Our IG dummy variable shows that IG firms require additional audit hours compared to NIG firms (0.12, t ‐value 2.75). Given that IG firms are larger than NIG firms (Mali and Lim 2019), we interpret that this dummy variable captures that larger firms require additional audit effort. Our interaction term Effi * IG shows the difference in the relationship between relative efficiency and audit hours for IG firms compared to NIG firms.…”

Section: Additional Analysismentioning

confidence: 99%

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Do Relatively More Efficient Firms Demand Additional Audit Effort (Hours)?

Mali

Lim

2020

Australian Accounting Review

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We examine whether firms with higher relative efficiency (operational performance) require additional audit effort (hours) to signal audit quality to demonstrate that their financial reporting systems are robust. Therefore, we use a Korean sample of publicly listed firms because of the Korean audit hour policy which mandates that audit hour information be made available for market participants. We find that client firms with higher relative efficiency have higher audit hours, suggesting that management has an incentive to demand additional audit hours for signalling purposes, and that shareholders, amongst other stakeholders, have an incentive to demand external monitoring to reduce potential agency problems. The results show that relative efficiency is a unique measure of firm performance that can provide insights into a client firm's business and audit risk. We also find evidence suggesting that audit firms do not subject clients to a fee (fee per hour) premium based on relative efficiency, supporting our finding that client firms require audit effort for signalling purposes. Thus, our results have important implications for policymakers about audit effort demand.

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“…The authors in [ 15 ] have studied the impact of firm ownership structure on corporate social responsibility: evidence from austerity U.K. In [ 16 ], authors have studied the influence of firm efficiency on agency credit ratings using a sample of Korean listed firms.…”

Section: Introductionmentioning

confidence: 99%

A novel investigation of the influence of corporate governance on firms’ credit ratings

et al. 2021

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Corporate governance is the way of governing a firm in order to increase its accountability and to avoid any massive damage before it occurs. The aim of this paper is to investigate the impact of capital structure, firms’ size, and competitive advantages of firms as control variables on credit ratings. We investigate the role of corporate governance in improving the firms’ credit rating using a sample of Jordanian listed firms. We split firms into four categories according to WVB credit rating. We use both the binary logistic regression (LR) and the ordinal logistic regression (OLR) to model credit ratings in Jordanian environment. The empirical results show that the control variables are strong determinants of credit ratings. When we evaluate the relationship between the governance variables and credit ratings, we found interesting results. The board stockholders and board expertise are moderately significant. The board independence and role duality are weakly significant, while board size is insignificant.

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The influence of firm efficiency on agency credit ratings

Cited by 14 publications

References 34 publications

Does relative (absolute) efficiency affect capital costs?

Does relative (absolute) efficiency affect capital costs?

Do Relatively More Efficient Firms Demand Additional Audit Effort (Hours)?

A novel investigation of the influence of corporate governance on firms’ credit ratings

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