Does Market Performance (Tobin’s Q) Have A Negative Effect On Credit Ratings? Evidence From South Korea

Lim, Hyoung Joo; Mali, Dafydd

Abstract

Tobin’s Q is an established measure of firm performance, based on investor confidence. However, the association between Tobin’s Q and credit ratings is not well-established in the literature. Using a sample of Korean listed firms over the 2001–2016 sample period, Probit regression analysis shows that overall, Tobin’s Q is positively associated with credit ratings. However, for firms with a > 1 (1 <) Tobin’s Q ratio, a negative (positive) relationship exists. Moreover, in independent regressions, a threshold level if found where the effect of Tobin’s Q on credit ratings changes from being positive (0.2), to negative (0.3). To the best of our knowledge, we are the first to demonstrate that credit rating agencies are nuanced when making default risk assessments. Specifically, that in South Korea, a threshold level exists, at which increasing Tobin’s Q values reduce credit ratings. Empirical evidence of the different association between Tobin’s Q (market confidence) and credit ratings can extend the literature and offer insights to market participants. Furthermore, because Tobin’s Q is a commonly used proxy for financial performance in accounting lectures, the study has practical implications for academics in classrooms.

Citation

Lim, H. J., & Mali, D. (2023). Does Market Performance (Tobin’s Q) Have A Negative Effect On Credit Ratings? Evidence From South Korea. Asia-Pacific Financial Markets, 31(1), 53-80. https://doi.org/10.1007/s10690-023-09406-x

• Journal Article Type: Article
• Acceptance Date: Apr 2, 2023
• Online Publication Date: May 10, 2023
• Publication Date: May 10, 2023
• Deposit Date: Dec 18, 2023
• Publicly Available Date: Dec 19, 2023
• Journal: Asia-Pacific Financial Markets
• Print ISSN: 1387-2834
• Electronic ISSN: 1573-6946
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 31
• Issue: 1
• Pages: 53-80
• DOI: https://doi.org/10.1007/s10690-023-09406-x
• Keywords: M15, M41, Tobin’s Q, M21, Mispricing/overvaluation, Accounting education, Credit ratings, M40
• Public URL: https://nottingham-repository.worktribe.com/output/28705279
• Publisher URL: https://link.springer.com/article/10.1007/s10690-023-09406-x
• Additional Information: Accepted: 2 April 2023; First Online: 10 May 2023