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Does market risk predict credit risk? An analysis of firm risk sensitivity, evidence from South Korea

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  • Hyoung-joo Lim
  • Dafydd Mali

Abstract

We empirically test the relation between stock volatility (market risk) and credit ratings (credit risk) using KRX listed firms. We find a negative relation between stock volatility and credit ratings. The results suggest that as stock price volatility increases, a firm is more likely to experience a credit rating decrease. After dividing our sample into investment and non-investment grade groups, we find the relation between volatility and a credit rating decrease diminishes in the investment grade sample compared to the non-investment grade sample. Overall, we find investment grade firms are more likely to absorb shocks associated with speculative investment/divestment compared to price sensitive non-investment grade firms.

Suggested Citation

  • Hyoung-joo Lim & Dafydd Mali, 2018. "Does market risk predict credit risk? An analysis of firm risk sensitivity, evidence from South Korea," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 25(1-2), pages 235-252, January.
    • Handle: RePEc:taf:raaexx:v:25:y:2018:i:1-2:p:235-252
    DOI: 10.1080/16081625.2016.1268060
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    Cited by:

    1. Dafydd Mali & Hyoung-Joo Lim, 2022. "Does relative (absolute) efficiency affect capital costs?," Annals of Operations Research, Springer, vol. 315(2), pages 1037-1060, August.
    2. Hyoung-Joo Lim & Dafydd Mali, 2024. "Does Market Performance (Tobin’s Q) Have A Negative Effect On Credit Ratings? Evidence From South Korea," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(1), pages 53-80, March.
    3. Ballester, Laura & González-Urteaga, Ana & Martínez, Beatriz, 2020. "The role of internal corporate governance mechanisms on default risk: A systematic review for different institutional settings," Research in International Business and Finance, Elsevier, vol. 54(C).
    4. Munawar Shabbir & Shazia Hassan & Ayesha Zareef, 2018. "Impact of Market Risk on Credit Risk of Subsequent Period in Manufacturing Sector of Pakistan," Global Social Sciences Review, Humanity Only, vol. 3(3), pages 281-299, September.
    5. Abdullah Mohammed Sadaa, 2022. "The Effect of Ownership Structure on the Nonperforming Loans in Iraqi Banks ," GATR Journals jfbr201, Global Academy of Training and Research (GATR) Enterprise.

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