TY - JOUR
T1 - Credit Ratings and Centrality of Chaebol-Affiliated Firms
AU - Park, Chan Kyoo
AU - Jeon, Jin Q.
N1 - Publisher Copyright:
© 2019, Korean Finance Association. All rights reserved.
PY - 2019/2
Y1 - 2019/2
N2 - Large groups of Korean corporations, known as Chaebols, are able to offer mutual management and finance support for their affiliated firms through a pyramidal ownership structure and share cross-holdings. In this context, the methodology of assigning credit ratings to Chaebol affiliates may differ from that used for standalone companies that do not belong to large Chaebols. For example, when assessing the ability of Chaebol affiliates to repay their debts, credit rating agencies may consider the possibility of the parent or other affiliates offering support. This may be a key reason why the credit ratings of Chaebol affiliates differ between domestic and overseas credit ratings. As part of the advancement of the credit rating market, the Korean government recently announced the step- by-step disclosure of corporate credit worthiness (independent credit rating) that excludes the possibility of support from parent companies and affiliates. The objective of this new policy is to provide investors with more information on which to base their investment decisions by providing details of the ability of individual affiliates to redeem their own debt without supports from other firms. In this study, we investigate the determinants of credit ratings for affiliated companies of Korean Chaebols and consider the distinct characteristics of the Chaebol structure. We use the methodology suggested by Almeida et al. (2011) to calculate the centrality and firm position of each affiliate in a Chaebol. The data on Chaebol-affiliated firms are obtained from the Large-scale Enterprise Group Information Disclosure System provided by the Korean Fair Trade Commission. We also use credit ratings from three major credit rating agencies in Korea for the period 2003 to 2015. After controlling for endogeneity, we find that the average credit ratings for Chaebol-affiliated firms are significantly higher than those of non-Chaebol-affiliated firms. We use the probit score matching model (PSM) to estimate the probability of a firm being incorporated into a Chaebol using the probit model. The result also shows that the average credit ratings of Chaebol-affiliated firms are higher than those of non-Chaebol-affiliated firms, suggesting that the possibility of business and financial support at the group level is reflected in the final credit rating. We then estimate the critical control centrality measure and position measure established by Almeidia et al. (2011) and apply those measures to the credit ratings of affiliated firms. The results of a two-step panel analysis show that affiliated firms with lower centrality measures tend to have higher credit ratings, but the relationship is not linear, suggesting that controlling shareholders may use central firms to give firms with a lower centrality operational and financial support, known as propping. The phenomenon of firms with a lower centrality having higher credit ratings is more evident when a group-wide boom occurs. This suggests that propping is more likely to occur during an economic boom. In general, our results show that the credit ratings of Chaebol affiliates that consider the support and transfer of wealth within the group are higher than those of affiliates that consider only themselves. However, controlling firms with a higher level of ownership by controlling shareholders and that hold the central role in the group are more likely to receive a lower credit rating when the possibility of support is considered than when they consider only themselves. This study contributes to the literature by investigating how the credit ratings of Chaebol-affiliated firms are determined and explaining their logic. In particular, we propose a relationship between centrality and credit rating in a Chaebol group using the centrality and position of each affiliate that adequately explains the complex cross-holding and pyramidal governance structure of Korean Chaebols.
AB - Large groups of Korean corporations, known as Chaebols, are able to offer mutual management and finance support for their affiliated firms through a pyramidal ownership structure and share cross-holdings. In this context, the methodology of assigning credit ratings to Chaebol affiliates may differ from that used for standalone companies that do not belong to large Chaebols. For example, when assessing the ability of Chaebol affiliates to repay their debts, credit rating agencies may consider the possibility of the parent or other affiliates offering support. This may be a key reason why the credit ratings of Chaebol affiliates differ between domestic and overseas credit ratings. As part of the advancement of the credit rating market, the Korean government recently announced the step- by-step disclosure of corporate credit worthiness (independent credit rating) that excludes the possibility of support from parent companies and affiliates. The objective of this new policy is to provide investors with more information on which to base their investment decisions by providing details of the ability of individual affiliates to redeem their own debt without supports from other firms. In this study, we investigate the determinants of credit ratings for affiliated companies of Korean Chaebols and consider the distinct characteristics of the Chaebol structure. We use the methodology suggested by Almeida et al. (2011) to calculate the centrality and firm position of each affiliate in a Chaebol. The data on Chaebol-affiliated firms are obtained from the Large-scale Enterprise Group Information Disclosure System provided by the Korean Fair Trade Commission. We also use credit ratings from three major credit rating agencies in Korea for the period 2003 to 2015. After controlling for endogeneity, we find that the average credit ratings for Chaebol-affiliated firms are significantly higher than those of non-Chaebol-affiliated firms. We use the probit score matching model (PSM) to estimate the probability of a firm being incorporated into a Chaebol using the probit model. The result also shows that the average credit ratings of Chaebol-affiliated firms are higher than those of non-Chaebol-affiliated firms, suggesting that the possibility of business and financial support at the group level is reflected in the final credit rating. We then estimate the critical control centrality measure and position measure established by Almeidia et al. (2011) and apply those measures to the credit ratings of affiliated firms. The results of a two-step panel analysis show that affiliated firms with lower centrality measures tend to have higher credit ratings, but the relationship is not linear, suggesting that controlling shareholders may use central firms to give firms with a lower centrality operational and financial support, known as propping. The phenomenon of firms with a lower centrality having higher credit ratings is more evident when a group-wide boom occurs. This suggests that propping is more likely to occur during an economic boom. In general, our results show that the credit ratings of Chaebol affiliates that consider the support and transfer of wealth within the group are higher than those of affiliates that consider only themselves. However, controlling firms with a higher level of ownership by controlling shareholders and that hold the central role in the group are more likely to receive a lower credit rating when the possibility of support is considered than when they consider only themselves. This study contributes to the literature by investigating how the credit ratings of Chaebol-affiliated firms are determined and explaining their logic. In particular, we propose a relationship between centrality and credit rating in a Chaebol group using the centrality and position of each affiliate that adequately explains the complex cross-holding and pyramidal governance structure of Korean Chaebols.
KW - Centrality
KW - Chaebols
KW - Credit Ratings
KW - Position
KW - Propping
UR - http://www.scopus.com/inward/record.url?scp=85175034228&partnerID=8YFLogxK
U2 - 10.37197/arfr.2019.32.1.2
DO - 10.37197/arfr.2019.32.1.2
M3 - Article
AN - SCOPUS:85175034228
SN - 1229-0351
VL - 32
SP - 33
EP - 54
JO - Asian Review of Financial Research
JF - Asian Review of Financial Research
IS - 1
ER -