Analyzing the Impact of Credit Ratings on Firm Performance and Stock Returns: Evidence from Taiwan

The respective study covers three aspects; factors determining credit rating, credit rating impact on performance of entities and the relation between stock returns and credit rating. The study focuses on the firms listed in Taiwan Stock Exchange (TSE) of Taiwan. The empirical analysis uses the data of 50 firms rated by Taiwan Ratings Corporation (TRC) for the period 2010-2015. Two estimation techniques Ordered Probit Model and Panel Data Regression are applied. The findings show that credit ratings are predicted by specific important firm factors like size, growth opportunities, capital intensity, asset returns, sector type etc. Moreover, it is further suggested that firms with higher credit rating tend to have better performance. Performance is measured using return on investment and Tobin’s q factors. Likewise, high rated firms tend to achieve higher returns on their stocks. Similar study should be carried out using other credit ratings covering more firms and time span.