رتبه بندی اعتباری و دارایی نقدی شرکت: اصلاحات شرکت کره پس از بحران مالی آسیا در 1997 Credit ratings and corporate cash holdings: Evidence from Korea’s corporate reform after the 1997 Asian financial crisis

1. Introduction Firms appear to take credit ratings into account when making their policy choices. For example, Graham and Harvey (2001) find that credit ratings are the second most important factor when managers determine capital structure. Moreover, the authors report that credit ratings are highly ranked in comparison with other traditional factors that can influence a firm’s capital structure. In this regard, Kisgen (2006) provides empirical evidence that credit rating concerns directly affect capital structure decisions. Begley (2015) also shows that, when firms try to improve their credit ratings, they reduce their expenditure on research and development (R&D) as well as their selling, general, and administrative expenses (SG&A). This results in less innovation, lower profitability, and a fall in firm values. Additionally, Bereskin et al. (2015) note that credit rating concerns are beneficial because they provide an incentive for managers to improve their firms’ corporate governance. However, although a number of studies examine the influence of credit ratings on firms’ policy decisions, few have focused on the effect of credit ratings on firms’ cash holdings. In this regard, this study examines whether sensitivity about credit ratings is significant for corporate cash policy decisions, given the discrete costs and benefits of rating changes. The influence of credit ratings on firms’ cash holdings has received much less attention, considering the common intuition that firms are safer when they hold more cash. However, it is reasonable to expect that when firms are sensitive to credit ratings they will increase their cash holdings, either to avoid a downgrade or to increase the chances of an upgrade. Moreover, if cash reserves were simply regarded as negative debt, it would be tempting to argue that an increase in cash holdings may imply a decrease in leverage (Subrahmanyam et al., 2015). In accordance with Kisgen’s (2006) main results, which note that firms with credit rating concerns reduce their leverage, we would expect firms that become more sensitive to credit ratings to decide to retain more cash. Although Kisgen (2006) examines all firms with “notched” credit ratings regardless of when their ratings changed,1 we focus on firms with credit ratings that became close to ratings upgrades or downgrades. In this context, it is reasonable to expect that managers deem credit ratings relatively more important immediately after changes to vulnerable credit ratings. Thus, we conduct detailed analyses of the effects of credit rating sensitivities on managers’ actions. The fundamental hypothesis of our study is that credit ratings are animportant considerationfor managers’ corporate policy decisions because of the costs and benefits associated with different rating levels. Primarily, firms’ credit ratings affecttheir costs of capital both directly and indirectly. Indeed, ratings have emerged as a major mechanismto correctthe informationasymmetryproblembetween firms and investors. In this regard, they act as signals of firm quality and as a possible source of information about such quality. Thus, a potential rating change should be an important element of a firm’s strategic decisions. Besides, firms can directly incur discrete costs from different credit rating levels. For instance, rating changes could lead to changes in coupon rates when a firm issues debt, or could result in a necessary repurchase of bonds.