Full paper corporate rating

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The Determinants of Corporate Credit Rating in Mongolian Stock Exchange Munkhtsetseg Sandagsuren* * - the Faculty of Economics of Mandakh Burtgel Institute Email: S_munkhtsetseg@mandakh.mn Abstract This paper aims to find out determinants of corporate credit rating and rating changes. Principally, we consider factors that determining credit ratings of listed firms in Mongolian Stock Exchange (MSE). As a frontier market, the MSE has encountered a number of challenges such as unstable business courses of listed firms and lagged information flow. Results from this paper are important and relevant for designing and constructing credit rating models and the credit rating scale which is critically essential to understand a capital market development. Our methodology introduced in this study is significantly related to a literature review of Alexander B. Matthies (2013). We focus mostly on the background papers specialized in determinants of corporate credit ratings. The determinants of credit ratings fall into three main categories. The first are financial ratios and financial data. These variables proxy firm specific factors such as leverage, liquidity, and firm size (e.g. Ederington (1985), Kamstra et al. (2001), and Blume et al. (1998)). The second category are corporate governance mechanisms. Here, factors such as ownership structure and board independence are measured (Bhojraj & Sengupta (2003) and Ashbaugh-Skaife et al. (2006)). The third group comprises macroeconomic factors that could influence credit ratings like GDP growth measures (e.g. Amato & Furfine (2004)). As the main result of the paper, we are expecting to gain basic empirical findings for modeling corporate credit rating in MSE. In this case, the model can produce a useful information about listed firms’ financial capability and their financial vulnerability for investors and lenders. Keywords: Corporate credit rating, Determinants, Initial-stage modelling for rating I. Introduction Mongolian Stock Exchange (MSE) provides its listed firms’ financial statements publicly. Corporate government indicator are recently released on market information flow. The Central bank and other agencies report publicly available macroeconomic data. These information influence significantly investors and lenders’ decision making process on investment. The MSE also release a large scale rating of its listed firms’ market efficiency that distinguish only three classes among listed firms. If one could consider that the market behavior is truly rational, the information that i firm obtains at time t would be identical to that of j firm at time t. However, it is challenging to obtain the same information on the same time for any agency who participates in the market. Our prospective object is to provide reliable and efficient information for all of agencies in the economy. To do that, we researchers seeks to rate different listed firms in their financial capability and vulnerability. Corporate credit rating can be useful to predict default or bankruptcy and to assess firms’ financial capability for investors 1


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