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    Rights statement: This is the peer reviewed version of the following article: Cho, H. and Choi, S. (2015), What Drives Credit Rating Changes? A Return Decomposition Approach. Asia-Pacific Journal of Financial Studies, 44: 899–931. doi: 10.1111/ajfs.12118 which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/ajfs.12118/abstract This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.

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What drives credit rating changes?: a return decomposition approach

Research output: Contribution to journalJournal article

Published

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What drives credit rating changes? a return decomposition approach. / Cho, Hyungjin; Choi, Sun Hwa.

In: Asia‐Pacific Journal of Financial Studies, Vol. 44, No. 6, 12.2015, p. 899-931.

Research output: Contribution to journalJournal article

Harvard

Cho, H & Choi, SH 2015, 'What drives credit rating changes? a return decomposition approach', Asia‐Pacific Journal of Financial Studies, vol. 44, no. 6, pp. 899-931. https://doi.org/10.1111/ajfs.12118

APA

Cho, H., & Choi, S. H. (2015). What drives credit rating changes? a return decomposition approach. Asia‐Pacific Journal of Financial Studies, 44(6), 899-931. https://doi.org/10.1111/ajfs.12118

Vancouver

Cho H, Choi SH. What drives credit rating changes? a return decomposition approach. Asia‐Pacific Journal of Financial Studies. 2015 Dec;44(6):899-931. https://doi.org/10.1111/ajfs.12118

Author

Cho, Hyungjin ; Choi, Sun Hwa. / What drives credit rating changes? a return decomposition approach. In: Asia‐Pacific Journal of Financial Studies. 2015 ; Vol. 44, No. 6. pp. 899-931.

Bibtex

@article{f200b75bd9c748638e2b0de4dfe1c0ea,
title = "What drives credit rating changes?: a return decomposition approach",
abstract = "This paper examines the relative importance of a shock to expected cash flows (i.e., cash-flow news) and a shock to expected discount rates (i.e., discount-rate news) in credit rating changes. Specifically, we use a Vector Autoregressive model to implement the return decomposition of Campbell and Shiller (Review of Financial Studies, 1, 1988, 195) and Vuolteenaho (Journal of Finance, 57, 2002, 233) to extract cash-flow news and discount-rate news from stock returns at the firm-level. We find that credit rating changes are, on average, more strongly associated with cash-flow news than with discount-rate news, consistent with cash-flow news being more permanent than discount-rate news. We further find that both cash-flow news and discount-rate news are more strongly related to credit rating changes when they convey negative information about firm value. This asymmetric association is consistent with the non-linear nature of default risk and with the fact that rating agencies incorporate bad news sooner than good news into their rating revisions. This paper contributes to the literature by providing evidence on the relative importance of cash-flow news and discount-rate news in the credit rating process.",
keywords = "Cash-flow news, Credit ratings, Discount-rate news, Return decomposition, Vector Autoregression",
author = "Hyungjin Cho and Choi, {Sun Hwa}",
note = "This is the peer reviewed version of the following article: Cho, H. and Choi, S. (2015), What Drives Credit Rating Changes? A Return Decomposition Approach. Asia-Pacific Journal of Financial Studies, 44: 899–931. doi: 10.1111/ajfs.12118 which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/ajfs.12118/abstract This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.",
year = "2015",
month = dec,
doi = "10.1111/ajfs.12118",
language = "English",
volume = "44",
pages = "899--931",
journal = "Asia‐Pacific Journal of Financial Studies",
issn = "2041-6156",
publisher = "John Wiley and Sons Ltd",
number = "6",

}

RIS

TY - JOUR

T1 - What drives credit rating changes?

T2 - a return decomposition approach

AU - Cho, Hyungjin

AU - Choi, Sun Hwa

N1 - This is the peer reviewed version of the following article: Cho, H. and Choi, S. (2015), What Drives Credit Rating Changes? A Return Decomposition Approach. Asia-Pacific Journal of Financial Studies, 44: 899–931. doi: 10.1111/ajfs.12118 which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/ajfs.12118/abstract This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.

PY - 2015/12

Y1 - 2015/12

N2 - This paper examines the relative importance of a shock to expected cash flows (i.e., cash-flow news) and a shock to expected discount rates (i.e., discount-rate news) in credit rating changes. Specifically, we use a Vector Autoregressive model to implement the return decomposition of Campbell and Shiller (Review of Financial Studies, 1, 1988, 195) and Vuolteenaho (Journal of Finance, 57, 2002, 233) to extract cash-flow news and discount-rate news from stock returns at the firm-level. We find that credit rating changes are, on average, more strongly associated with cash-flow news than with discount-rate news, consistent with cash-flow news being more permanent than discount-rate news. We further find that both cash-flow news and discount-rate news are more strongly related to credit rating changes when they convey negative information about firm value. This asymmetric association is consistent with the non-linear nature of default risk and with the fact that rating agencies incorporate bad news sooner than good news into their rating revisions. This paper contributes to the literature by providing evidence on the relative importance of cash-flow news and discount-rate news in the credit rating process.

AB - This paper examines the relative importance of a shock to expected cash flows (i.e., cash-flow news) and a shock to expected discount rates (i.e., discount-rate news) in credit rating changes. Specifically, we use a Vector Autoregressive model to implement the return decomposition of Campbell and Shiller (Review of Financial Studies, 1, 1988, 195) and Vuolteenaho (Journal of Finance, 57, 2002, 233) to extract cash-flow news and discount-rate news from stock returns at the firm-level. We find that credit rating changes are, on average, more strongly associated with cash-flow news than with discount-rate news, consistent with cash-flow news being more permanent than discount-rate news. We further find that both cash-flow news and discount-rate news are more strongly related to credit rating changes when they convey negative information about firm value. This asymmetric association is consistent with the non-linear nature of default risk and with the fact that rating agencies incorporate bad news sooner than good news into their rating revisions. This paper contributes to the literature by providing evidence on the relative importance of cash-flow news and discount-rate news in the credit rating process.

KW - Cash-flow news

KW - Credit ratings

KW - Discount-rate news

KW - Return decomposition

KW - Vector Autoregression

U2 - 10.1111/ajfs.12118

DO - 10.1111/ajfs.12118

M3 - Journal article

VL - 44

SP - 899

EP - 931

JO - Asia‐Pacific Journal of Financial Studies

JF - Asia‐Pacific Journal of Financial Studies

SN - 2041-6156

IS - 6

ER -