The Influence of the Affiliate Factor on Firms Credit Rating: Necessity of Stand-Alone Rating System

Abstract

To verify the necessity of stand-alone rating system, I investigate that whether a firm belongs to the affiliates or not (affiliate factor) affects on the relationship between bond rating and financial information. The first result documents that raters adjustment about the affiliates does not much infringe explanatory power of financial ratios for bond rating except liability and the weight of each financial variable that rater generally reflect on credit rating is rather higher in the subsample of affiliates rather than that of non-affiliates. However, it may be the result caused by the vast difference in size of two samples. So, secondly, I divide the sample of affiliated company into two groups which has strong features of group-company and which is similar to non-group company with weak group-integration according to intensity of integration. The result from main ordered logistic regression, slightly different with the result from OLS regression, documents that credit raters evaluate financial ratios such as debt ratio and asset size of the affiliates with strong group integration more positively. That is, affiliate factor influences on bond rating explicitly by analysts notching point on the affiliates financial attributes. Additionally, I use OLS and ordered logistic regression model including both subsidiarys and its parent companys financial attributes for observing how much parent firms financial peculiarities influence on the target firms credit rating apart from the target firms financial variables. The last result gives evidence that parent firms financial attributes affect on bond rating significantly as well as the firms financial attributes which means that the bond rating of affiliates can be inflated caused by raters subjective opinion apart from its financial status. Especially, the finding shows that raters generally consider asset stability, profitability, and liability and profitability of the parent firm positively when they evaluate affiliates creditworthiness regardless default risk or risk of tunneling, implying that credit raters prefer group-company unconditionally and they are aggressive and positive to affiliated companys credit rating rather than conservative . Especially Taken together, affiliate factor influences on firms credit rating significantly in diverse ways. So, credit rating of the affiliates after adopting stand-alone rating system will be much changed from present rating and it is necessary to adopt stand-alone rating system to evaluate firms creditworthiness more concretely.