The Effects of Divergence between Cash Flow and Voting Rights on the Relevance of Fair Disclosure and Credit Ratings
Abstract
:1. Introduction
2. Prior Literature and Hypotheses Development
2.1. The Determinants of Credit Ratings
2.2. Disclosure Quality and Credit Ratings
2.3. Disclosure Quality and Credit Ratings in Terms of Divergence between Cash-Flow and Voting Rights
3. Research Methodology
3.1. Research Design
3.2. Sample Selection
4. Results
4.1. Descriptive Statistics and Correlation Analysis
- (1)
- Variables’ definitions are as follows: RATING1, RATING2, and RATING3 are the credit ratings of corporate bonds assigned by the three top rating agencies; WEDGE is the divergence between cash-flow rights and voting rights; WEDGEHIGH is the dummy variable that takes the value of one if the ownership divergence of the firm belonging to a large business group is more than the median, and zero otherwise; FD is the number of fair disclosures; SIZE is the natural logarithm of the total assets; ROA is the net income before the extraordinary items are divided by lagged total assets; LEV is the total debt divided by total assets; MTB is the market value of equity divided by the book value of equity; PPE refers to the tangible assets divided by the total assets; Z_SCORE is the modified Altman’s Z-score of MacKie-Mason(1990); INTEREST is earnings before interests, taxes, depreciation and amortization divided by interest expenses; BETA is the firm’s beta estimated using a market model over the fiscal year; FOREIGN is the rate of foreign investor ownership.
- (2)
- The numbers of firm-year observations of RATING1, RATING2, and RATING3 are 1029, 1100, and 1111, respectively.
- (3)
- Descriptive statistics are calculated after winsorization of the top and bottom 1% of a continuous variable in their distribution.
4.2. Main Regression Analysis
5. Discussion and Conclusions
Author Contributions
Funding
Acknowledgments
Conflicts of Interest
References
- Sengupta, P. Corporate disclosure quality and the cost of debt. Account. Rev. 1998, 73, 459–474. [Google Scholar]
- Ashbaugh-Skaife, H.; Collins, D.W.; LaFond, R. The effects of corporate governance on firms’ credit ratings. J. Account. Econ. 2006, 42, 203–243. [Google Scholar] [CrossRef]
- Lee, A.Y.; Kim, S.H.; Kang, Y.S. The firms in large business group and the voluntary disclosure. Korean J. Account. Res. 2012, 17, 57–81. (In Korean) [Google Scholar]
- Yang, D.H.; Lee, S.C.; Yoon, J.C. Effects of disclosure quality on cost of debt. Korean Manag. Rev. 2011, 40, 803–830. (In Korean) [Google Scholar]
- Lee, S.C. A study on the relationship between disclosure quality and cost of debt capital. Korean Account. J. 2011, 20, 1–34. (In Korean) [Google Scholar]
- Jeong, K.H.; Lee, D.; Jeong, S.W. The type of preliminary earnings announcement and commercial paper credit rating. Korean Manag. Rev. 2013, 42, 383–410. (In Korean) [Google Scholar]
- Hwang, K.; Kim, K. The effect of voluntary disclosure quality on the cost of debt. Korean Account. J. 2013, 22, 369–397. (In Korean) [Google Scholar]
- Jeong, M.; Lee, S.C. Effects of timely disclosure level on the number of financial analysts and bond ratings. Korean Account. J. 2015, 24, 1–36. [Google Scholar]
- Eng, L.L.; Mak, Y.T. Corporate governance and voluntary disclosure. J. Account. Public Policy. 2003, 22, 325–345. [Google Scholar] [CrossRef]
- Claessens, S.; Djankov, S.; Lang, L.H.P. The separation of owership and control in East Asian Corporations. J. Financ. Econ. 2000, 58, 81–112. [Google Scholar] [CrossRef]
- Kim, J.B.; Yi, C.H. Ownership structure, business group affiliation, listing status, and earnings management: evidence from Korea. Contemp. Account. Res. 2006, 23, 427–464. [Google Scholar] [CrossRef]
- Ahn, H.B. The empirical study on relationship of firm’s governance-owener structure and earnings management. Korean Account. Rev. 2004, 29, 117–154. (In Korean) [Google Scholar]
- Mork, R.; Shleifer, A.; Vishny, R. Management ownership and market valuation. J. Financ. Econ. 1998, 20, 293–315. [Google Scholar] [CrossRef]
- Shleifer, A.; Vishny, R. A survey of corporate governance. J. Financ. 1997, 52, 737–783. [Google Scholar] [CrossRef]
- Kim, K.T. The level of wedge and accounting transparency. Account. Audit. Res. 2008, 48, 73–108. (In Korean) [Google Scholar]
- Kim, M.I.; Choi, J.H. The association between the wedge between voting right and cash flow right and conservatism. Account. Audit. Res. 2008, 47, 181–210. (In Korean) [Google Scholar]
- Sonu, C.H.; Choi, J.H.; Lee, B.H. The effect of the wedge between voting right and cash flow right on error in analysis’ earnings forecasts. Korean Account. Rev. 2010, 35, 1–34. [Google Scholar]
- Yoo, H.Y.; Lee, A.Y.; Chae, S.J. The effect of controlling shareholders’ ownership structure on firms’ credit rating. J. Ind. Econ. Bus. 2016, 29, 2499–2518. (In Korean) [Google Scholar]
- Shim, H.; Lee, M.; Choi, J.H. Ownership divergence and the frequency of information disclosure. Korean Account. Rev. 2010, 35, 39–74. [Google Scholar]
- Kim, H.J.; Park, M.K. The impacts of the wedge on the association between earnings management and management forecast errors. J. Account. Financ. 2016, 34, 1–25. (In Korean) [Google Scholar]
- Bhojraj, S.; Sengupta, P. Effect of corporate governance on bond ratings and yields: the role of institutional investors and outside directors. J. Bus. 2003, 76, 455–475. [Google Scholar] [CrossRef]
- Liu, Y.; Jiraporn, P. The effect of CEO power on bond rating and yields. J. Empir. Financ. 2010, 17, 744–762. [Google Scholar] [CrossRef]
- Jorion, P.; Shi, C.; Zhang, S. Tightening credit standards: the role of accounting quality. Rev. Account. Stud. 2009, 14, 123–160. [Google Scholar] [CrossRef]
- Park, J.I.; Park, C.W. Does income smoothing improve bond ratings?–some empirical evidence on KOSPI and KOSDAQ listed firms-. Tax Account. J. 2012, 13, 9–47. (In Korean) [Google Scholar]
- Shin, J.Y.; Suh, C.W.; Park, J.I. The effect of corporate governance on the association between earnings and credit ratings. Korean Management Review. 2012, 41, 1309–1345. (In Korean) [Google Scholar]
- Na, I.C.; Kim, J.H. Does accrual quality moderate the informativeness of earnings with respect to corporate bond ratings? J. Account. Financ. 2009, 27, 241–273. [Google Scholar]
- Kim, M.T.; Wee, J.B.; Jeon, S.I. Controlling effects of corporate bond grading system on earnings management. Asia-Pacific J. Financ. Stud. 2006, 35, 45–74. (In Korean) [Google Scholar]
- Botosan, C.A. Disclosure level and cost of equity capital. Account. Rev. 1997, 72, 323–349. [Google Scholar]
- Yu, F. Accounting transparency and the term structure of credit spreads. J. Financ. Econ. 2005, 75, 53–84. [Google Scholar] [CrossRef]
- Francis, J.; Lafond, R.; Olsson, P.; Schipper, K. The market pricing of accruals quality. J. Account. Res. 2005, 39, 295–327. [Google Scholar] [CrossRef]
- Cheng, M.; Subramanyam, K.R. Analyst following and credit ratings. Contemp. Account. Res. 2008, 25, 1007–1043. [Google Scholar] [CrossRef]
- Jensen, M.C.; Meckling, W.H. Theory of the firm: managerial behavior, agency cost and ownership structure. J. Financ. Econ. 1976, 3, 305–360. [Google Scholar] [CrossRef]
- Mansi, S.A.; Maxwell, W.F.; Miller, D.P. Analyst forecast characteristics and the cost of debt. Rev. Account. Stud. 2011, 16, 116–142. [Google Scholar] [CrossRef]
- Akins, B. Financial reporting quality and uncertainty about credit risk among rating agencies. Account. Rev. 2018, 93, 1–22. [Google Scholar] [CrossRef]
- Orens, R.; Aerts, W.; Lybaert, N. Intellectual capital disclosure, cost of finance and firm value. Manag. Decis. 2009, 47, 1536–1554. [Google Scholar] [CrossRef] [Green Version]
- La Rosa, F.; Liberatore, G.; Mazzi, F.; Terzani, S. The impact of corporate social performance on the cost of debt and access to debt financing for listed European non-financial firms. Eur. Manag. J. 2018, 36, 519–529. [Google Scholar] [CrossRef]
- Lee, B.H. Essays on the intraday market response to corporate disclosure subject to regulation fair disclosure. Ph.D.Thesis, Seoul National University, Seoul, Korea, 2009. [Google Scholar]
- Kim, J.H.; Chang, J.H.; Yeo, E.J. The effect of regulation fair disclosure on market responses to earnings disclosure. Korea Bus. Rev. 2005, 34, 1895–1915. (In Korean) [Google Scholar]
- Oh, W.J.; Sohn, S.K. An empirical study on the effect of regulation fair disclosure and firm incentives associated with the decision to provide information through fair disclosure. Korea Bus. Rev. 2006, 35, 1449–1478. (In Korean) [Google Scholar]
- Kwon, S.Y.; Lee, D.H.; Hwang, M.H. The accuracy of management earnings forecast after adopting regulation fair disclosure. Korean Account.Rev. 2009, 34, 107–141. (In Korean) [Google Scholar]
- Lee, S.Y.; Roh, B.G. The change in earnings value relevance driven by regulation fair disclosure. Korean Account. Rev. 2011, 36, 37–70. (In Korean) [Google Scholar]
- Yoo, G.S.; Cha, S.M.; Yoo, Y.K.; Rhee, C.S. Management earnings forecasts and cost of equity capital: Korean evidence. Korean Account. Rev. 2013, 38, 209–243. (In Korean) [Google Scholar]
- Na, Y.; Leem, W.B. An empirical analysis on association between fair disclosure and the cost of equity capital. Korean Account. Rev. 2014, 39, 1–42. (In Korean) [Google Scholar]
- Lee, A.Y.; Chun, S.B.; Park, S.S. The effect of unfaithful disclosure on the cost of debt. Korean Account. Rev. 2008, 33, 127–158. (In Korean) [Google Scholar]
- Jiang, J. Beating earnings benchmarks and the cost of debt. Account. Rev. 2008, 83, 377–416. [Google Scholar] [CrossRef]
- Park, J.I.; Yoon, S.R. Earnings management intervals and means: comparative study of credit rating and cost of debt. Korean Account. Rev. 2013, 38, 209–260. [Google Scholar]
- Claessens, S.; Djankov, S.; Fan, J.P.H.; Lang, L.H.P. Disentangling the incentive and entrenchment effects of large shareholdings. J. Financ. 2002, 57, 2741–2771. [Google Scholar] [CrossRef]
- Fan, J.P.H.; Wong, T.J. Corporate ownership structure and the informatvieness of accounting earnings in east Asia. J. Account. Econ. 2002, 22, 401–425. [Google Scholar] [CrossRef]
- La Porta, R.; de Silanes, L.; Sheleifer, A.; Vishnny, R. Corporate ownership around the world. J. Financ. Econ. 1999, 58, 3–27. [Google Scholar] [CrossRef]
- Johnson, S.; Boone, P.; Breach, A.; Friedman, E. Corporate governance in the Asia financial crisis. J. Financ. Econ. 2000, 58, 141–186. [Google Scholar] [CrossRef]
- Hope, O.; Thomas, W.B. Managerial empire building and firm disclosure. J. Account. Res. 2008, 46, 591–626. [Google Scholar] [CrossRef]
- Land, M.H.; Lundholm, R. Corporate disclosure policy and analyst behavior. Account. Rev. 1996, 71, 467–492. [Google Scholar]
- Hong, H.A.; Kim, J.B.; Welker, M. Divergence of cash flow and voting rights, opacity, and stock price crash risk: international evidence. J. Account. Res. 2017, 55, 1167–1212. [Google Scholar] [CrossRef]
- MacKie-Mason, J.K. Do taxes affect corporate financing decisions? J. Finan. 1990, 45, 1471–1491. [Google Scholar] [CrossRef]
- Kim, M.T.; Kim, Y.H. The impacts of foreign ownership and outside directors on bond grading. Korean Account. Rev. 2007, 32, 29–58. (In Korean) [Google Scholar]
- Healy, P.M.; Palepu, K. Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. J. Account. Econ. 2001, 31, 405–440. [Google Scholar] [CrossRef]
Sample Selection Criteria | Firm-Years |
---|---|
| 9116 |
| 8390 |
| 7964 |
| 7886 |
| 2003 |
| 1323 |
| 1281 |
Variable | Mean | Standard Deviation | Min | Lower Quartile | Median | Upper Quartile | Max |
---|---|---|---|---|---|---|---|
RATING1 | 15.650 | 2.868 | 1 | 14 | 16 | 18 | 20 |
RATING2 | 15.437 | 2.997 | 1 | 14 | 16 | 17 | 20 |
RATING3 | 15.346 | 2.993 | 1 | 14 | 16 | 17 | 20 |
FD | 6.032 | 5.804 | 0 | 1 | 5 | 17 | 26 |
WEDGE | 25.714 | 20.109 | −4.39 | 4.592 | 26.371 | 38.902 | 90.012 |
WEDGEHIGH | 0.5 | 0.5 | 0 | 0 | 0 | 1 | 1 |
SIZE | 21.992 | 1.368 | 19.052 | 21.043 | 22.003 | 22.987 | 25.419 |
ROA | 0.049 | 0.050 | −0.095 | 0.022 | 0.044 | 0.076 | 0.190 |
LEV | 0.574 | 0.165 | 0.193 | 0.462 | 0.587 | 0.682 | 0.951 |
MTB | 1.118 | 0.440 | 0.589 | 0.853 | 0.991 | 1.229 | 3.192 |
PPE | 0.366 | 0.190 | 0.002 | 0.218 | 0.373 | 0.494 | 0.935 |
Z_SCORE | 1.770 | 0.748 | 0.330 | 1.270 | 1.641 | 2.170 | 4.164 |
INTEREST | 0.175 | 0.607 | 0 | 0.025 | 0.053 | 0.111 | 5.441 |
BETA | 0.964 | 0.389 | 0.110 | 0.690 | 0.980 | 1.250 | 1.780 |
FOREIGN | 0.187 | 0.152 | 0 | 0.061 | 0.152 | 0.279 | 0.612 |
Credit Ratings | Credit Ratings Number | Firm-Year Obs. | Classification | ||
---|---|---|---|---|---|
RATING1 | RATING2 | RATING3 | |||
AAA | 20 | 70 | 70 | 68 | Investment Grade |
AA+ | 19 | 86 | 87 | 84 | |
AA | 18 | 108 | 116 | 108 | |
AA− | 17 | 174 | 167 | 155 | |
A+ | 16 | 137 | 141 | 144 | |
A | 15 | 145 | 152 | 171 | |
A− | 14 | 115 | 110 | 129 | |
BBB+ | 13 | 61 | 88 | 88 | Non-Investment Grade |
BBB | 12 | 65 | 97 | 83 | |
BBB− | 11 | 29 | 32 | 30 | |
BB+ | 10 | 16 | 15 | 21 | |
BB | 9 | 3 | 3 | 8 | |
BB− | 8 | 2 | 2 | 3 | |
B+ | 7 | 2 | 2 | ||
B | 6 | 1 | |||
B− | 5 | 1 | 2 | 2 | |
CCC | 4 | 6 | 10 | 11 | |
CC | 3 | ||||
C | 2 | 3 | 2 | 3 | |
D | 1 | 2 | 4 | 3 | |
Sum | 1029 | 1100 | 1111 |
Variable | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) | (11) | (12) | (13) | (14) |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(1) RATING1 | 1 | |||||||||||||
(2) RATING2 | 0.989 *** | 1 | ||||||||||||
(3) RATING3 | 0.981 *** | 0.986 *** | 1 | |||||||||||
(4) FD | 0.355 *** | 0.372 *** | 0.390 *** | 1 | ||||||||||
(5) WEDGEHIGH | −0.181 *** | −0.182 *** | −0.217 *** | −0.215 *** | 1 | |||||||||
(6) SIZE | 0.498 *** | 0.491 *** | 0.505 *** | 0.477 *** | −0.291 *** | 1 | ||||||||
(7) ROA | 0.329 *** | 0.343 *** | 0.292 *** | 0.170 *** | −0.079 ** | −0.038 | 1 | |||||||
(8) LEV | −0.526 *** | −0.539 *** | −0.520 *** | −0.034 | 0.060 * | 0.066 * | −0.420 *** | 1 | ||||||
(9) MTB | 0.128 *** | 0.137 *** | 0.118 *** | 0.169 *** | −0.065 * | −0.102 *** | 0.452 *** | −0.142 *** | 1 | |||||
(10) PPE | 0.058 | 0.072 * | 0.079 *** | −0.035 | 0.023 | 0.048 | 0.010 | −0.045 | −0.099 *** | 1 | ||||
(11) Z_SCORE | 0.342 *** | 0.362 *** | 0.282 *** | 0.048 | −0.011 | −0.098 *** | 0.539 *** | −0.270 *** | 0.284 *** | −0.246 *** | 1 | |||
(12) INTEREST | 0.152 *** | 0.158 *** | 0.127 *** | 0.059 * | −0.001 | 0.009 | 0.216 *** | −0.178 *** | 0.180 *** | −0.077 ** | 0.164 *** | 1 | ||
(13) BETA | −0.154 *** | −0.158 *** | −0.096 ** | 0.129 *** | −0.096 *** | 0.249 *** | −0.071 * | 0.177 *** | 0.011 | −0.126 *** | −0.120 *** | 0.046 | 1 | |
(14) FOREIGN | 0.532 *** | 0.534 *** | 0.555 *** | 0.403 *** | −0.318 *** | 0.486 *** | 0.373 *** | −0.328 *** | 0.210 *** | 0.027 | 0.127 *** | 0.184 *** | 0.049 | 1 |
Variables | (1) RATING1 | (2) RATING2 | (3) RATING3 |
---|---|---|---|
FD | 0.033 *** | 0.034 *** | 0.035 *** |
(4.30) | (4.61) | (4.66) | |
SIZE | 0.741 *** | 0.735 *** | 0.706 *** |
(16.67) | (17.16) | (17.27) | |
ROA | −3.159 *** | −3.214 *** | −3.614 *** |
(−3.07) | (−3.24) | (−3.65) | |
LEV | −5.737 *** | −5.785 *** | −5.572 *** |
(−19.62) | (−20.49) | (−20.23) | |
MTB | 0.465 *** | 0.503 *** | 0.345 *** |
(4.72) | (5.33) | (3.71) | |
PPE | 0.752 *** | 0.789 *** | 0.871 *** |
(3.36) | (3.73) | (4.29) | |
Z_SCORE | 0.580 *** | 0.511 *** | 0.570 *** |
(9.34) | (8.21) | (9.95) | |
INTEREST | 0.143 *** | 0.098 | 0.098 * |
(2.37) | (1.38) | (1.74) | |
BETA | −0.813 *** | −0.782 *** | −0.688 *** |
(−7.56) | (−7.40) | (−6.68) | |
FOREIGN | 2.862 *** | 2.595 *** | 3.102 *** |
(9.13) | (8.09) | (9.92) | |
YEAR | YES | YES | YES |
INDUSTRY | YES | YES | YES |
N | 1029 | 1100 | 1111 |
LR Chi2 | 1646.58 | 1717.04 | 1731.85 |
Pseudo R2 | 0.341 | 0.329 | 0.328 |
Variables | (1) RATING1 | (2) RATING2 | (3) RATING3 |
---|---|---|---|
FD | 0.046 *** | 0.042 *** | 0.050 *** |
(4.80) | (4.69) | (5.33) | |
WEDGEHIGH | 0.298 *** | 0.243 *** | 0.313 *** |
(2.82) | (2.42) | (3.16) | |
FD*WEDGEHIGH | −0.026 ** | −0.019 | −0.031 ** |
(−2.01) | (−1.49) | (−2.55) | |
SIZE | 0.746 *** | 0.747 *** | 0.720 *** |
(16.75) | (17.30) | (17.46) | |
ROA | −3.065 *** | −3.100 *** | −3.472 *** |
(−2.97) | (−3.09) | (−3.49) | |
LEV | −5.769 *** | −5.807 *** | −5.600 *** |
(−19.68) | (−20.49) | (−20.26) | |
MTB | 0.477 *** | 0.530 *** | 0.380 *** |
(4.82) | (5.58) | (4.06) | |
PPE | 0.759 *** | 0.752 *** | 0.854 *** |
(3.39) | (3.54) | (4.20) | |
Z_SCORE | 0.583 *** | 0.500 *** | 0.574 *** |
(9.38) | (8.01) | (10.02) | |
INTEREST | 0.126 ** | 0.091 | 0.081 |
(2.09) | (1.26) | (1.43) | |
BETA | −0.813 *** | −0.785 | −0.695 *** |
(−7.54) | (−7.42) | (−6.74) | |
FOREIGN | 2.910 *** | 2.654 *** | 3.105 *** |
(9.11) | (8.10) | (9.77) | |
YEAR FE | Yes | Yes | Yes |
INDUSTRY FE | Yes | Yes | Yes |
N | 1029 | 1100 | 1111 |
LR Chi2 | 1654.55 | 1722.98 | 1742.06 |
Pseudo R2 | 0.343 | 0.331 | 0.330 |
© 2019 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).
Share and Cite
Park, J.-H.; Lee, J.; Choi, Y.-S. The Effects of Divergence between Cash Flow and Voting Rights on the Relevance of Fair Disclosure and Credit Ratings. Sustainability 2019, 11, 3657. https://doi.org/10.3390/su11133657
Park J-H, Lee J, Choi Y-S. The Effects of Divergence between Cash Flow and Voting Rights on the Relevance of Fair Disclosure and Credit Ratings. Sustainability. 2019; 11(13):3657. https://doi.org/10.3390/su11133657
Chicago/Turabian StylePark, Jin-Ha, Jiyeon Lee, and Youn-Sik Choi. 2019. "The Effects of Divergence between Cash Flow and Voting Rights on the Relevance of Fair Disclosure and Credit Ratings" Sustainability 11, no. 13: 3657. https://doi.org/10.3390/su11133657