Effect of Credit Rating on Firm Performance and Stock Return: Evidence form KSE Listed Firms

2014:104

This study investigates the determinants of credit ratings of firms and the impact of credit rating on firms’ performance and stock return for listed firms in Pakistan. For empirical analysis of this study, panel data of 63 financial and nonfinancial firms rated by Pakistan Credit Rating Agency (PACRA) and Karachi Stock Exchange covering period from 2007-2011 is used on the basis of availability of data. The results are obtained by applying two estimation techniques. First, to estimate the determinants of credit rating Ordered Probit approach is used. Second, the generalised method of moments (GMM) technique is applied on panel data to estimate the relationship between credit rating and firm performance and also for credit ratings and stock returns. The results illustrate that firm specific factors (leverage, firm size, profitability, and growth opportunities dividend per share) and corporate governance attributes (board size, block holders, shareholder’s rights and CEO duality) are important factors in predicting firms’ credit rating in Pakistan. The analysis further suggests that firms with higher credit ratings have higher corporate performance and firms with higher credit ratings tend to have higher stock returns. The analysis of this study might facilitate debt holders, investors, shareholders and other stake holders to understand the significance of credit ratings and its influence on performance and stock returns of firms.