In other words, the company's credit ratings help in assessing the creditworthiness of fixed issuers. In this regard, corporate credit ratings are concerned about the possibility of default (Ross, Westerfield, & Jaffe, 2013). There are a few studies that show that corporate credit ratings can be improved through better corporate governance (CG) practices (Setyapurnama & Norpratiwi, 2003; Setyaningrum, 2005; Ashbaugh-Skaife, Collins, & Lafond, 2006; Bradley, Chen, Dallas, & Snyderwine, 2007; Aman & Nguyen, 2013).
As CG practices are expected to have a positive impact on creditors, this study focuses on the impact of CG practices on corporate credit ratings in Indonesia. Aman and Nguyen (2013) previously used CG attributes to investigate the impact of CG practices on corporate credit ratings. For example, Ashbaugh-Skaife et al. 2006) investigated the impact of shareholder rights, as measured by G_SCORE, on corporate credit ratings.
In this regard, corporate credit ratings will improve if blockholders exercise effective monitoring functions (Bhojraj & Sengupta, 2003). Bhojraj and Sengupta (2003) find that there is a positive relationship between corporate credit ratings and institutional ownership. H3: The level of percentage ownership by institutional investors has a positive effect on the credit ratings of companies.
H8: Firms' credit ratings are lower for firms experiencing net income losses compared to others.
Research Design
Conversely, a firm that suffers a loss of net income will have lower credit ratings than other firms (Ashbaugh-Skaife et al., 2006). Company size can also determine credit ratings. 2006) reveal that company size has a positive effect on credit ratings. 2006) argue that default risk will be lower and credit ratings will be higher because larger firms have greater ability to pay debts.
Observations include credit ratings obtained from newly issued bonds and revised credit ratings from existing bonds. For this company, this study includes an A credit rating in the first year, an AA credit rating in the third year, and an AA credit rating in the fourth year as observations of the study. This study collected data on the bond ratings of PT Pefindo, which is the dominant credit rating agency in Indonesia and is affiliated with Standard & Poor's. bond risk.
The debtor's ability to meet its long-term financial obligations on the debt instrument is superior compared to other Indonesian debtors. The debtor's ability to meet its long-term financial obligations on the debt instrument is very strong compared to other Indonesian debtors. However, it is more likely that adverse economic conditions or changing circumstances will result in a weakened ability of the obligor to meet its long-term financial obligations under the debt instrument.
Although the obligor currently still has the capacity to meet its long-term financial obligations relating to the debt security, any adverse business, financial or economic conditions are likely to impair the obligor's ability or willingness to meet its long-term financial obligations to the obligor. debt security. D Collateral is rated D when it is in default, or default on a credit-rated obligation occurs automatically upon the first occurrence of non-payment of the obligation. The business risk assessment evaluates the most important success factors in the industry in which the company is classified.
However, this study assumes that CG practices have an impact on the variables used by rating agencies in determining credit ratings. The current study uses the CG scores adopted from the IICD to measure the CG practices of the samples. To test the influence of CG on corporate credit ratings, this study uses the ordered logit model, where corporate credit ratings are ordered from number one (1) to six (6).
The value of the variable Y to be observed will depend on the interval cutoff point. Next, the value of Z is calculated as the predicted value of the regression results in equation 1.
Results
Further, higher percentage ownership by blockholders, regardless of blockholder identity, results in better firm credit ratings. They find that firms' credit ratings are positively affected by CG practices in this way, supporting the first hypothesis (significant at 1 percent). Since firms have lower asymmetric information, firms' credit ratings tend to be higher (Aman & Nguyen, 2013) and the cost of capital tends to be lower (Tran, 2014).
Further, the findings of this study show that credit ratings of firms are not only affected by shareholder rights, but also by other factors such as disclosure and transparency and board responsibilities. For example, better disclosure and transparency can reduce the degree of asymmetric information between creditors and shareholders, thus promoting higher credit ratings of firms. The results presented in Table 7 suggest that blockholder ownership has a significant positive impact on firms' credit ratings.
Given that the rule of investor protection in Indonesia is relatively weak (La Porta et al., 1999), the finding that there is a positive impact of blockholder ownership on credit ratings is consistent with La Porta et al.'s (2000) proposals. The current study does not find any positive impact of institutional ownership on corporate credit ratings. Thus, the results in the current study indicate that higher blockholder ownership improves corporate credit ratings and family ownership worsens corporate credit ratings, but institutional investor ownership does not affect corporate credit ratings.
This result is contrary to Ashbaugh-Skaife et al. 2006), but agrees with Setyapurnama and Norpratiwi (2003) who find no relationship between the level of leverage and firm credit ratings. One possible argument for this is that firm leverage does not affect firm credit ratings, instead firm leverage is affected by firm credit ratings. Kisgen (2006) shows that changes in firm credit ratings force firms to change their optimal capital structure.
Consistent with Ashbaugh-Skaife et al. 2006), this study is also unable to find any impact of interest hedging on corporate credit ratings. The result of this study indicates that operating losses do not have a significant impact on the companies' credit ratings. This study finds that company size has a positive impact on companies' credit ratings (significant at 1 per cent).
The results in Table 7 also show that capital intensity has a positive impact on firms' credit ratings (significant at 1 percent), supporting hypothesis H10. Consequently, the probability of default is lower and stable credit ratings are increased (Ashbaugh-Skaife et al., 2006).
Conclusion
In that regard, this study generated sufficient evidence to show that comprehensive CG practices can reduce agency problems between creditors and shareholders. This study also finds that firm credit ratings of family ownership are lower than those of other ownership. This withdrawal may result in higher bankruptcy risks and also exacerbate debt agency costs (Ellul et al., 2007).
Thus, the existence of concentrated ownership has a significant positive influence on a company's strategic decision and thus has a positive impact on companies' creditworthiness. Leverage, interest coverage and the presence of losses as indicators of corporate default risk do not significantly affect corporate creditworthiness, while profitability has a positive effect on corporate creditworthiness. So the greater the efficiency in managing the company's assets to make profits, the greater the company's ability to pay its debts.
Finally, this study finds that firm size and capital intensity have a positive impact on firm credit ratings. The implication of this study is that firms should improve their CG practices to facilitate the issuance of long-term debt at better credit ratings. This study also shows that higher concentrated ownership of blockholders has the advantage of performing oversight functions in firms that can lead to higher debt ratings.
Because not many listed companies in Indonesia issued bonds in the years 2004 to 2008, this study contains limited observations. Future studies should increase the sample size, extend the study period, and use more recent panel data. In this regard, future studies may wish to investigate the impact of the revised law on CG practices and credit ratings, and thus the effectiveness of the law.
Effects of corporate governance on bond valuations and returns: The role of institutional investors and outside directors. Form versus substance: The effect of ownership structure and corporate governance on firm value in Thailand.
