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Credit ratings and corporate risk-taking behavior: evidence from Korea

Author

Listed:
  • Seiwoong Hong
  • Wonkyun Kim
  • Junyong Lee
  • Frederick Dongchuhl Oh

Abstract

We study the period following the 1997 Asian financial crisis to show that the credit rating downgrades affect corporate risk-taking behaviour. We treat the crisis as an exogenous shock that led to improvements in the informativeness of Korea’s credit rating system, and we determine that firms that have experienced credit rating downgrades reduce their risk-taking following the crisis. However, we show that this impact is less pronounced for chaebol-affiliated firms. Furthermore, we present chaebol firms’ characteristics that mitigate the negative impact of credit rating downgrades on their risk-taking behaviour – high net internal capital flow and large ownership concentration. (JEL G24, G32)

Suggested Citation

  • Seiwoong Hong & Wonkyun Kim & Junyong Lee & Frederick Dongchuhl Oh, 2023. "Credit ratings and corporate risk-taking behavior: evidence from Korea," Applied Economics Letters, Taylor & Francis Journals, vol. 30(16), pages 2200-2207, September.
    • Handle: RePEc:taf:apeclt:v:30:y:2023:i:16:p:2200-2207
    DOI: 10.1080/13504851.2022.2095336
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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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