Essays on Corporate Governance, Financial Accounting and Credit Ratings - International Empirical Evidence
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Philipps-Universität Marburg
Abstract
Starting with the de-regulation of national markets at the beginning of the 1990s over the last decades standard setters around the world have worked hard to further develop national corporate governance-systems in order to attract investors and thereby to increase the welfare of their own country. In this process of regulatory competition the Anglo-Saxon ‘exit-system’, which is characterized by highly efficient capital markets and is typical for the United States of America (USA) and Great Britain, seems to be the undoubted and aspired point of reference. Resulting from this, the ‘role model’ for the current regulatory policy focusses on the more intensive use of capital market institutions as well as of other corresponding governance-mechanisms. As an essential part of these capital market institutions the systems of financial accounting have been developed in favor of the shareholder-oriented international standards (IFRS) in many countries. Those standards are characterized by a high information content and decision usefulness with respect to capital market players and thus are not supposed to serve – in contrast to European and Asian traditions – the protection of creditors. At this point it is questionable whether and to what extent such a change is reasonable with regard to the financing behavior of firms.
Parallel to this development, credit ratings issued by rating agencies have gathered more and more interest in academia as well as in practical applications as a relatively new and alternative source of information for investors acting on capital markets. In its original meaning such ratings express a forward-looking opinion about the ability of an issuer to fulfill a complete and timely payment of obligations. Thus, credit ratings characterize highly aggregated opinions about the economic situation and hence the risk position of firms. Credit ratings have not been regulated yet, but instead represent a voluntary element of the capital market communication of firms. With regard to their primary objective to allow for a consolidated judgement about the company under investigation, credit ratings are closely linked to the purpose of financial reporting as well as to the corporate governance of firms which is supposed to improve the economic efficiency and growth as well as investor confidence by ensuring the stakes of equity and debt holders. It can therefore be asked which features in the context of financial reporting and corporate governance determine credit ratings and what drives the motivation of companies to voluntarily pursue a rating.
The dissertation, consisting of five separate contributions, sheds light on the issues outlined above in the context of corporate governance, accounting and credit ratings. Firstly, it deals with the empirical relationship between the German corporate governance-system and the adequacy of a certain type of financial accounting. Secondly – starting with a thorough analysis of the state of the art of empirical research on credit ratings – the dissertation deals with the determinants of credit ratings and the rating behavior of companies based on an extensive international sample. Thirdly, it is analyzed – with regard to large German corporations – if the (new) regulatory ‘role model’ of a capital market-based ‘exit model’ of corporate governance in Germany and Europe respectively is adequate in the sense that capital market-affine firms outperform the bank-oriented counterparts.
The analysis of the relationship between corporate governance, accounting and credit ratings consistently show that depending on the actual design of the corporate governance as well as due to country-specific differences the uniform adoption of the US corporate governance-system does not seem to be appropriate for other countries. Based on long term empirical evidence with regard to the financing patterns of large German companies it can be shown that from the perspective of decision-makers of German companies a capital market-orientated environment seems only to be of limited interest and thus deprives ground to any regulation with a strong capital market-orientations [‘(legal) form over (economic) substance ’]. Comparable results are derived in the context of the analysis on the relevance and the ‘content’ of credit ratings which on the one hand show that corporate governance has no systematic, but rather a selective influence on credit ratings and on the other hand rating agencies use country- and/or regional-specific criteria to account for corporate governance (‘cultural dependence on credit ratings’). These findings are in line with the empirical performance effects of large German corporations: Capital market-based entities do not outperform their bank-oriented counterparts.
Keywords
credit ratings, financial crisis, policy making, corporate governance, financial accounting