The Impact of Sectoral Diversification on Credit Ratings
Research output: Contribution to conference › Paper › peer-review
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2022. Paper presented at The 11th International Conference of the Financial Engineering and Banking Society, Portsmouth, United Kingdom.
Research output: Contribution to conference › Paper › peer-review
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TY - CONF
T1 - The Impact of Sectoral Diversification on Credit Ratings
AU - Khoo, Shee-Yee
AU - Vu, Huong
AU - Xing, Xiaofei
PY - 2022/6
Y1 - 2022/6
N2 - This paper investigates the impact of corporate sectoral diversification on credit ratings by analysing a large sample of 2,403 US firms rated by S&P Global Ratings during the period 1990–2016. We find that diversified firms have higher ratings than stand-alone firms, suggesting that diversification improves ratings. In addition, we classify diversification based on business relatedness and find that unrelated diversified firms have higher ratings than related diversified firms, which can be explained by the coinsurance effects. Furthermore, we also categorise diversification based on value creation and find that firms with diversification premiums have higher ratings than firms with diversification discounts, indicating that credit rating agencies value operating synergies. Finally, the effect of unrelated diversification on credit rating is only significant for the diversification-discount firms but insignificant for the diversification-premium firms. It means, in the presence of synergy effects, coinsurance effects cannot further improve ratings. In the absence of value creation, coinsurance effects explain the rating improvement of diversified firms.
AB - This paper investigates the impact of corporate sectoral diversification on credit ratings by analysing a large sample of 2,403 US firms rated by S&P Global Ratings during the period 1990–2016. We find that diversified firms have higher ratings than stand-alone firms, suggesting that diversification improves ratings. In addition, we classify diversification based on business relatedness and find that unrelated diversified firms have higher ratings than related diversified firms, which can be explained by the coinsurance effects. Furthermore, we also categorise diversification based on value creation and find that firms with diversification premiums have higher ratings than firms with diversification discounts, indicating that credit rating agencies value operating synergies. Finally, the effect of unrelated diversification on credit rating is only significant for the diversification-discount firms but insignificant for the diversification-premium firms. It means, in the presence of synergy effects, coinsurance effects cannot further improve ratings. In the absence of value creation, coinsurance effects explain the rating improvement of diversified firms.
M3 - Paper
T2 - The 11th International Conference of the Financial Engineering and Banking Society
Y2 - 10 June 2022 through 12 June 2022
ER -