Analyzing the Impact of Credit Ratings on Firm Performance and Stock Returns: Evidence from Taiwan

Abstract

The study covers three aspects; factors determining credit ratings, impact of credit ratings on performance of entities and the relationship between stock returns and credit ratings. The study focuses on the firms listed in Taiwan Stock Exchange (TSE) of Taiwan. The empirical analysis uses the data of 50 firms rated by Taiwan Ratings Corporation (TRC) for the period 2010-2015. Two estimation techniques Ordered Probit Model and Panel Data Regression are applied. Performance is measured using return on investment and Tobin's Q factors. The findings depict that credit ratings are predicted by important firm specific factors like size and growth opportunities, capital intensity, asset returns, sector type etc. Results also suggested that firms with higher credit ratings tend to have better performance. For future research, similar study may be conducted with the ratings issued by other Taiwanese or non-Taiwanese agencies covering more firms and time span.<br />