Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
The Effect of Asset Impairment Recognition on Corporate
Bond Credit Rating
Sung Il Jeon, Jeong Eun Kim and Panpan Feng
This study analyzes the effect of asset impairment recognition on
corporate bond credit rating. Asset impairment, as an item which is
subjective and highly discretionary without affecting cash flow, is most
susceptible to discretionary utilization by management. The corporate
bond credit rating may involve the occurrence of profit adjustment by
discretionary accounting selection or recognition of asset impairment and
is regarded as an important guideline representing the company's status.
Therefore, this study intends to empirically analyze whether asset
impairment accounting has a practical economic meaning in assessing
credit rating.
The empirical analysis shows the following results; firstly, the
comparatively analysis(t-test) on asset impairment recognition shows
corporate bond credit rating no significant differences seen, but corporate
bond credit rating, according to the analysis results, the recognition of
asset impairment was recognized group than in the low-grade corporate
bond credit rating. In other words, recognition of asset impairment is
found to negatively affect the corporate bond credit rating assessment.
Secondly, the results supported the hypothesis that there would be a
negative impact of asset impairment recognition on the evaluation of
corporate bond credit rating. The recognition of an impairment loss for the
investment-grade firms corporate bonds were related a more negative
impact on the credit rating. With a stable financial condition and good
credit rating, the recognition of asset impairment had an impact of
corporate profits to reduce the negative(-).
However the recognition of asset impairment in the speculative-grade
firms was not significant by corporate bond credit rating. Under an
unstable financial condition and low credit rating, the corporate bond
credit rating will affect the ability for repayment borrowings on useful than
the recognition of asset impairment.
Ⅰ. Introduction
There has been a large volume of researches on asset impairment, beginning in the US
in the mid-1980s. Interest in asset impairment accounting has recently increase,
particularly in terms of earnings management, which comprises an opportunistic acts on
the part of management. Asset impairment may be considered as the amount which

Sung-Il Jeon, Assistant Professor School of Business Administration Chonnam National University.
Email : sijeon@chonnam.ac.kr

Jeong-Eun Kim, Ph. D. Candidate School of Business Administration Chonnam National University,
Email : reicoo@nate.com

Panpan Feng, Master’s Course School of Business Administration Chonnam National University,
Email : pan87127@hanmail.net
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
exceeds the collectible amount１ of assets over the book value of a cash generating unit２.
That is when the collectible amount of assets is lower than the book value the applicable
reduced amount may be recognized as the asset impairment. However it is very difficult to
adjust the difference by comparing the book value and the collectible amount, as this
depends on the subjective estimation. Especially as the asset impairment size of tangible
and intangible assets is likely to be decided by subjective managerial judgment, the
possibility that management may use their discretion seems likely to be large.
The credit rating system is reflects both financial and non-financial factors that affect the
overall repayment abilities of firms and Korea is adopting the compulsory attachment of
corporate credit ratings in the case of issuing corporate bonds. Credit rating agency
evaluation is recognized as a very important factor as these ratings independently
represent a summarized firm’s state. For example, credit ratings affect capital cost and firm
values such as the corporate bond issuing interest rate and stock issuance price.
Accordingly, firms intending to issue corporate bonds will make various efforts to achieve
better credit ratings. As the reported profits are a major index of future profits, which in turn
decides the repayment ability of firms, many studies have reported that there are
systematic positive(+) relationships between the corporate bonds credit rating and
profits(Kaplan and Urwitz 1979; Ziebart and Reiter 1992; Kim and Kim 2002; Kim et al.
2006; Lee et al. 2008). However reported profits as summarized information, not only
affect operating performances but are items in which management may intervene through
discrete accounting selection. Credit rating agencies may be recognized this when they
assess the awareness of earnings management and asset impairment which can arise
through discrete accounting selection on the part of management. If credit rating agencies
reflect the adjusted earnings that are not filtered in the performing credit rating of firms,
they would be turned away from the market which requests high quality information and
likewise the concern of providing distorted information to investors would be significant.
That is, it would be meaningful to analyze asset impairment accounting is a system which
analyzes actual economic significance in evaluating the credit rating.
Based on this logic, this study is to analyze effects of asset impairment recognition on
corporate bonds credit rating evaluation for firms issued debentures. The asset impairment
is an item which is likely to recognize through subjective judgment of the management
discretionally in general and affect the reported earnings negatively (-) by increasing cost
of firms, which would affect the credit rating evaluation of firms negatively.
This study investigated first if there are differences in the return on total assets, current
ratio, total assets turnover ratio, debt ratio, firm size and foreigners’ ownership according to
recognition of asset impairment for firms which received the credit rating with the sample
period from 2000 when the asset impairment system was introduced officially and to 2009.
１
２
A bigger amount between fair value less costs to sell and value in use of asset or cash
generating unit
Cash generating unit is a smallest unit for identification for an asset group generating cash inflow
independently from that of other assets and asset groups and in case where it is impossible to
forecast the recoverable amount of individual asset, the recoverable amount of cash generation
unit should be decided for damage test.
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Second, the corporate bond credit ratings from AAA to BBB-are the investment-grade
bonds of which debt servicing ability are accepted and so the analysis of differences
between major factors were made while dividing credit ratings from BB+ to D as the
speculative-grade which are largely affected by the environment changes. Third, to
analyze effects of asset impairment recognition on corporate bond credit rating, the
regression analysis was performed using the ordered Logit Model with the corporate bond
credit rating a dependent variable.
This paper is organized as follows; Section 2 presents the literature review and provides
the background of this study. Section 3 introduces the research methods.. Section 4
provides Sample Selection and the empirical results, and Section 5 offers our concluding
remarks.
Ⅱ. Literature Review
This study is to analyze the impact of asset impairment recognition on corporate bond
credit rating. Therefore, it can be divided into the precedent studies related with asset
impairment accounting and studies on the corporate bond credit rating. Above all, studies
related with corporate bond credit rating would be discussed. The early phase studies
using the financial ratios took interest in the estimate of credit rating and typical studies of
them are Horrigan (1966), Pouge and Soldofsky (1969), etc. Characteristics of them lie in
that the multi-regression analyses were taken by setting accounting data and the financial
ratios as independent variables and setting the credit rating from 9 points (Aaa) to 1 point
(c) as encoded dependent variables. They estimated the credit ratings considered the
financial variables but had limitation in that basic assumptions of the least square method
(OLS) were not satisfied by estimating the independent variables or the ordinal scale in
respect of statistics by the regression method(McKelvey and Zanovia, 1975). Owing to this
limitation of OLS model, Pinches and Mingo (1973) developed a model which is useful in
estimating corporate bond credit rating evaluation using multivariate discriminant analysis.
As a result, 5 financial variables including long-term debt, ROA derived from the factor
analysis and non-financial factors including the priority of security rights were found to be
useful factors in estimating the credit rating and about 69.7% of the estimate force was
shown. But this method ignores important information of dependent variables where the
constant interval sequence exists in the credit rating as it sees the value of each
dependent variable as the separate category. Kalpan and Urwitz (1979) pointing out
problems of study methodology using the recognition analysis and discriminant analysis in
the existing studies attempted to the credit rating estimate by N-Probit model. This model
assumes all dependent variables observed by researchers are the ordinal scale and
presumed independent and dependent variables have a set of linear relationships.
Through N-Probit model which is estimated by the maximum likelihood estimation,
variables such as cash flow, long-term debt, net income, and market beta estimate the
credit rating and the accuracy of classification was 72%.
Studies on asset impairment includes ones for cause recognition of asset impairment,
ones for value relevance of asset impairment and ones for asset impairment and earnings
management. First, in the studies on recognition cause of asset impairment, Strong and
Meyer (1987) revealed there is no difference between financial performances before
reporting the asset impairment between firms which reported the asset impairment and
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
firms which did not report the asset impairment and the asset impairment is mainly
recognized during the period when the debt ratio is improving. On the contrary, according
to the study of Elliot and Shaw(1988), firms recognized asset impairment showed
significantly lower ROA and ROE than other firms in the same industry and also showed
the relatively low stock return rate and the asset growth rate in years of asset impairment
recognition. According to the study of Riedl(2004) who investigated directly asset
impairment recognition cause of the management, it was found to be carried out mainly
due to opportunistic causes of the management rather than economic factors such as
changes of sales, net income, and operating cash flows.
Next, in the study on value relevance of asset impairment, Ress et al.(1996) and Francis
et al.(1996) showed the investment return and stock rate of return of firms which
recognized asset impairment for 2 ~ 3 years before recognition of asset impairment were
significantly lower than the median and it was observed the negative responses to asset
impairment existed in the market. But the negative response is reported to have
distinctiveness depending on characteristics of asset impairment. According to Elliot and
Hanna(1996), the earnings response coefficient was shown to be lowest in the first quarter
in which the impairment loss was recognized and it was observed the earnings response
coefficient was found to be larger in case of more recognition of asset impairment than the
case where the number of asset impairment recognition was small. The study of Bunsis
(1997) also reported the stock market reaction to the impairment seemed to appear
discriminatory depending on the impact on future cash flows. That is, the larger the size of
asset impairment which causes addition of future cash flows, the larger the negative value
of earnings response was. The study of Hogan and Jeter(1998) showed asset impairment
has the positive relation with the stock rate of return in case of firms with negative net
income before adjusting restructuring cost, which suggests the asset impairment may be
treated differently in the market according to firm characteristics of recognizing the asset
impairment. Cho and Paek (2006) conducted the empirical analysis on recognition
frequency of asset impairment by asset impairment recognition cause after dividing them
into effective reporting cause３ and ineffective reporting cause of the management. As a
result, the ratios which divided the difference between the net income before the
recognition of asset impairment, the net income before the recognition of asset impairment
for the current term and the previous term net income by the net income for the previous
term were significant as the estimate values which can divided effective reporting cause
and ineffective reporting cause of the management. And the frequency of asset impairment
recognition was higher as firms are classified as firms have high ineffective reporting
cause of the management such as income smoothing cause and big bath cause or CEOs
are replaced.
Lastly, to see studies on the asset impairment and earnings management, Zucca and
Campbell(1992) reported the average of the impairment took very large weight in the net
income and net assets of firms with 4% of total assets and 13% of sales. This implies the
asset impairment can be used for the purpose of earnings management. Heflin and
３
Effective report cause refers to incentives to provide information in a manner most satisfying the
basic purpose of accounts of useful information provision to decision makers.
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Warfield(1997) analyzed if the time of recording the impairment loss is adequate and if the
asset impairment is recorded excessively to manage future earnings and there was not
any evidence that the asset impairment is recognized in lump sum at one not to affect the
future earnings adversely but some evidences the asset impairment is recognized
excessively for the income smoothing of firms. Li(2001) investigated excessive or under
recognition of asset impairment for Chinese companies and as a result it was found under
recognition was found in 1998 when the voluntary recognition of asset impairment was
adopted but companies which intended to report the earnings higher (lower) recognized
the asset impairment more (less), which showed the asset impairment may be used as a
tool for opportunistic earnings management of the management. To sum the precedent
studies up, as the size of asset impairment is likely to be decided by the subjective
judgment of the management, it seems to be used by the management discretionally.
Many precedent studies showed the management has used items with discretionary usage
for earnings management and the history of asset impairment has been considered as a
sign of earnings management(Palepu et al 2010). The credit rating depends on the
reported earnings of firms largely and the management intends to raise the earnings
through discretionary accounting choice to achieve the higher credit ratings. Especially,
when the earnings are expected to low, the management would try to get the favorable
ratings in the corporate bond credit rating evaluation through the excessive earnings
management. Namely, the degree of earnings management is expected to affect corporate
bond credit rating evaluation adversely and it has been found the lower the degree of
earnings management is, the higher the credit rating of a firm is(Moon-tae Kim et al. 2006).
The studies on the asset impairment have been carried out to date but there is scarcely
any study which investigated the relationship between the asset impairment and corporate
bond credit rating. Therefore, this study is to analyze the impact of the current credit
evaluation system in which the asset impairment accounting can control the discretion of
the management.
Ⅲ. Research Method
3.1 Hypothesis
Evaluation of corporate bond credit ratings for firms provides data to stakeholders for
rational investment decision-making. That is, the credit rating has significance as an
indicator which reports the business activities which are connected organically in addition
to functions of measuring and reporting the debt service ability for corporate bonds. For
example, when the net loss is generated due to the poor operating activities, the debt ratio
is likely to increase due to the deficit in the capital account. This fact seems to be reflected
in the credit rating by the accounting system which catches it systematically through
various channels. As is seen in this example, the rational investor would uncertainty
consider the recognition of asset impairment as a sign of uncertainty for future debt service
ability. Also, the credit rating agencies would report the earnings by the summarized
financial information of business performances(Sengupta 1998; Khurana and Raman
2003). Further, they would take charge in more objective analysis for operating income of
firms more than other financial experts in the capital market as they are not direct
stakeholders derived from the business performances(Ederington and Goh 1998).
To recognize the impairment loss, the judgment process of estimating future cash flows
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
expected from the assets subject to impairment loss and adjusting into the collectible
amount is required. So, the discretion of the management is likely to be involved widely in
the process of deciding the recognition of asset impairment. That is, there is possibility the
asset impairment may be used as a tool for opportunistic earnings management by the
management. Precedent studies also showed recognition of the asset impairment may be
used for strategic purposes of earnings management due to discretion or flexibility of the
management assigned by accounting(Heflin and Warfield 1997; Li 2001; Riedl 2004).
The effective credit rating will affect the earnings management activities of the
management. If the credit rating agencies consider the earnings management activities as
opportunistic motivation, they would not evaluate it favorably and the degree of earnings
management by good credit ratings would be relatively low(Kim et al. 2006). Also, the
management would make efforts to maintain credit rating and further raise the improved
evaluation of credit rating through accounting earnings(Choe and Shin 2006). The
followings are descriptions of asset impairment at the hearing held relative to layoffs in
Ssangyong Motors.
"The debt ratio of Ssangyong Motors soared to 561% form 168% as of the end of 2008.
That is why the accounting corporation requested by the company reduced the appraised
value of tangible assets such as buildings, machinery, etc. by 517.7 billion won for the
previous year. The appraised value of tangible assets decreased to 867.8 billion won from
1,334.6 billion won. The Generally Accepted Accounting Principles provide to use the
higher of the future cash (use value) which can be generated by using assets and the cash
(net disposal value) which can be achieved through sales of assets in evaluating intangible
assets. Usually the appraised value of Korea Appraisal Board is used for net sales price
and the future sales amount and cost expected by the company is used as the use value.
But the accounting corporation decided the value of manufacturing facilities of Ssangyong
Motors is “0” without any need of calculation as they are merely lumps of scraps.
However according to the report of Korea Appraisal Board in March 2009, the appraisal
value of tangible assets amounted to 670 billion won４ (the certified public accountant who
participated in the hearing as a testifier pointed out “on evaluating the production facility as
scraps, the principle of on-going entity was violated).
Like this, behaviors of recognizing the impairment loss as the use value which can be
extended or reduced like a rubber band according to discretion of the management seems
to be accounting fraud. Also, this accounting fraud affects the firm value negatively (-) as
well as the firms in evaluation of credit rating for corporate bonds. In this respect, the asset
impairment which has a potential of being used as a tool of opportunistic earnings
management by the management would affect evaluation of corporate bond credit rating
adversely(Palepu et al 2010).
This study would analyze research hypotheses as followings through precedent studies
and logics as above.
Hypothesis 1: Recognition of asset impairment would have a negative impact on the
corporate bond credit rating.
４
“Manufacturing facilities of Ssangyong Automobile, a mass of scrap metal?” Jung, Eunju,
Hanguerae 21, No. 932, 2012.10.22.
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
3.2 Research Model
The corporate bonds credit rating is assumed to be evaluated based on the financial
performances and non-financial performances of the previous fiscal year. That is, it is
assumed the credit rating is granted by the prior firm situation in the ex post actor
way(Ederington and Yawitz 1986; Shi 2003). The first rating out of corporate bonds credit
rating for t term as a dependent variable of research model and the explanatory variable is
the financial and non-financial variables for t-1 term.
RANKt = 0 + 1AWD(WD)t-1 + 2AROAt-1 + 3CRt-1 + 4ATURNOVER + 5LEVt-1
+ 6SIZEt-1 + 7FORt-1 + 8AUDt-1 + 9NEGEt-1 + 10∑kYRkt +ε
RANK = depending on corporate credit ratings granted to the score value by 1 score for
20 ratings from AAA (20 points) to D (1 point)
AWD = Asset Impairment / Total Assets.
WD = If Asset Impairment recognition is 1, and 0 otherwise.
AROA = (Asset Impairment + Net Income) / Total Assets５
CR = Current Assets / Current Liabilities
ATURNOVER = Sales / Total Assets
LEV = Total Liabilities / Total Assets
SIZE = Log of Total Assets
FOR = the ratios of foreigners’ ownership
AUD = If Qualified Audit Opinion is 1, and 0 otherwise.
NEGE = 1 when Net Income is negative, and 0 otherwise
YRk = 1 when the data belong to year k, and 0 otherwise (k=2000, 2001, 2002.....2009).
As discrete variables which are assigned of scores in the descending order by 1 score for
20 ratings from AAA (20 points) to D (1 point) as independent variables of this study, the
regression analysis using the Ordered Logit Model was carried out. In case of using credit
rating as a dependent variable, it takes the form of discrete variable rather than the
continuous variable and so it may not correspond to the probability distribution assumed in
the linear regression model (OLS). So, the analysis was performed using the Ordered
Logit Model(Ashbaugh-Skaife et al. 2006; A Young Lee et al. 2008).
The main explanatory variable in this study is the impairment loss variable (AWD). The
asset impairment is likely to be decided by the subjective judgment of the management
and the management is likely to use discretionally. Therefore, if there is any possibility for
the management not to reflect the economic reality due to intervention of discretion by the
management in recognizing the impairment loss, the credit rating agencies would consider
it as the negative signal and the asset impairment would be estimated as the negative (-)
sign for corporate bond credit rating.
５
The asset impairment reversal is not deducted from AROA since the firm samples which made
asset impairment reversal from 2000 to 2009 are 20; the total of asset impairment reversal to
total asset is 0.0269; and the average is 0.001 value.
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
To consider effects of the impairment variable on corporate bond credit rating, first there
is a need to control the firm's business performances. As AROA represents the indicator of
general earnings of firms, it is estimated as a positive (+) sign to the corporate bond credit
rating. the current ratio, which represents the liquidity to measure cash payment ability of
firms is estimated as a positive (+) sign in the corporate bond credit rating and the total
assets turnover rate as a typical variable representing the activity measuring effective
operation ability of assets is estimated as a positive (+) sign, also there are the debt ratio
(LEV) and firm size (SIZE) as major financial variables in evaluating credit rating. The debt
ratio is a value which shows the ability of servicing the principal and interests for the longterm liabilities and the degree of dependency on outside capital out of total assets. And the
high debt ratio means the risk of default is high and so the negative (-) sign is expected in
the credit rating. And as the firm size which is measured by natural log from total assets is
likely to be achieve safer ratings through reciprocal payment guarantee effects in case of
large firms, it seems to be a control variable which affects the credit rating positively (+). As
for the foreigners’ ownership (FOR), foreign investors favor firms with good financial
performance and stability, the positive (+) sign of credit rating is expected the audit opinion
(AUD) is expected of the positive (+) sign as effects of the unqualified audit opinion on the
credit rating. Lastly, the negative earnings are expected of the negative (-) sign in the
credit rating. In the precedent studies, the relationship between the net income and the
stock price showed different shapes qualitatively more in case of the negative (-) net
income than the positive (+) net income. This study intended to show the difference in the
regression coefficient of net income in case of the positive (+) net income and negative (-)
net income by including the dummy variable (NEGE) in the negative (-) net income. Also, if
the depend variables are determined by the economic situation for a certain year
regardless of independent variables, the cross-sectional correlation in observed values
and the time series autocorrelation exists in nature of financial variables, which causes the
autocorrelation of residual. Since the estimated regression coefficient and the standard
error may be unbiased due to this cross-sectional and time-series correlation, the dummy
variables by year (YR) were added to control them(Park et al. 2004).
Ⅳ. Sample Selection and Results of Empirical Analysis
4. 1 Sample selection
Samples of this study are firms of which corporate bond credit ratings are available data
the credit rating agencies (Korea Investors Service Inc. (KIS), Korea Ratings Corporation
(KR), and NICE Information Service Co., Ltd (NICE)) from 2000 when the asset
impairment accounting system was officially introduced to 2009. The samples are listed
firms and the specific criteria of sample selection are as followings:
(1) Sample firms of which corporate bond credit ratings are available data the credit
rating agencies.
(2) Sample firms exclude firms in the financial firms.
(3) Sample firms have December 31 fiscal year-ends.
(4) Sample firms exclude firms without necessary financial data.
(5) Companies which are not in completed impaired capital situation.
(6) Variables used in the empirical analysis should be less than 1% of the top and
bottom range.
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Corporate bond credit ratings from the credit rating agencies typically range 20 grades
from AAA to D depending on the extent of debt service abilities. The credit ratings from
AAA to BBB are deemed to have timely repayment ability and rating less than BB are
classified as speculative ones of which timely repayment abilities can be largely influenced
by the change of situations. <Table 1> shows the definition of credit rating system.
<Table 1> Credit Rating System
The debt service ability is superlative.
The debt service ability is excellent but inferior to AAA bonds.
The debt service ability is excellent but may be more affected by the
economic situation and situation deterioration than superior rated bonds.
BBB
The debt service ability is good but has a potential that the future ability may
be weakened by the economic situation and situation deterioration than
superior rated bonds.
BB
The debt service ability is not a problem now but the speculative factor is
included in that the future safety is not certain
B
It is speculative for the debt service ability is poor and the payment of
interests in the recession is not sure
CCC
There are unstable factors in debt service and it is speculative for the risk of
default is very large.
CC
The concerned factors are larger than superior ratings.
C
The risk of default is large and there is not the debt service ability
D
Default state
* Ratings from AA to B out of above ratings represents the additional classes by adding +
or - sign.
AAA
AA
A
In this study, the first credit rating was selected when there are multiple ratings for the
same firm. While firms which settle accounts in December was 6,134 except for financial
institutions listed in the stock exchange from 2000 to 2009 but samples excluding to the
omission of financial data, firms with impaired capital and top and bottom firms to remove
the extreme effects in the empirical analysis process. Out of them, firms of which corporate
bond credit rating data are available were 1,744 firms. To divide them by recognition of
asset impairment, firms which recognized the asset impairment are 365 and firms which
did not recognized it were 1,379. Table 2 shows the distribution of corporate bond credit
rating by year. To see the distribution of corporate bond credit rating, the firms at the very
high and low ranges of credit rating showed the relatively less observance values than
firms in the intermediate ranges like studies in the past. Specifically, the top and bottom
classes were 17.41% and 3.33% respectively out of total 1,744 samples. According to the
credit rating system of <Table 1>, ratings from AAA to BBB- which are acknowledged to
have the debt service ability take 80.3% in the total samples and the speculative grade
from BB+ to D, which are largely affected by the environment change, took 19.7%.
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
<Table 2> Distribution of credit grades for chosen samples
YEAR
GRADE RANK
SUM
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
AAA
20
5
7
7
7
5
5
5
5
5
5 56
AA+
19
1
1
1
2
2
6
7 10 11 41
AA
18
1
2
4
5
7
9
6
6 11 17 68
AA17
9
9
6 10 11 13 14 18 24 25 139
A+
16
10 12 17 18 12 10 13 16 20 21 149
A
15
15 13 12 15 16 17 18 20 22 23 171
A14
22 22 13 18 22 21 29 24 19 19 209
BBB+
13
17 15 20 21 22 17 17 17 18 20 184
BBB
12
35 29 23 25 25 29 21 15 12 11 225
BBB11
27 21 13 21 18 17 16 14
8
5 160
INVESTMENT
142 130 116 141 140 140 145 142 149 157 1402
GRADE
BB+
10
16 10 11 12
9
2
3
3
3
6 75
BB
9
30 24 12
9
7
7
7
6
3
3 108
BB8
14
6
6
4
3
1
1
2
4
2 43
B+
7
3
2
2
3
2
2
4
2
3
4 27
B
6
5
4
5
3
1
2
5
5
1
32
B5
0
CCC
4
1
1
1
1
3
2
5
7
8 29
CC
3
1
1
1
1
4
C
2
3
4
3
1
2
1
2
16
D
1
1
2
4
1
1
9
SPECULATIVE
72 53 41 34 25 18 22 27 25 25 342
GRADE
TOTAL
214 183 157 175 165 158 167 169 174 182 1744
%
3.21
2.35
3.89
7.96
8.53
9.79
11.97
10.54
12.89
9.16
80.3
4.30
6.19
2.46
1.55
1.89
0.00
1.66
0.23
0.92
0.52
19.7
100
4. 2 Descriptive Statistics
Table 3 shows the descriptive statistics of the 1,744 sample which issued corporate
bonds. The average (median) of credit rating, the major variable (RANK) shows 13.160,
the scores of BBB+ (13.000). During the research period, to combine the fact that more
than BBB- ratings are observed relatively more than ratings below BB +, the credit rating
agencies of Korea seem to provide more generous evaluation in the credit rating. While
the average of asset impairment recognition is 0.002, the maximum value was found to be
0.124. This may be attributed to recognition of large asset impairment amount in some
firms. Therefore, when using the asset impairment discretionally, it was found the
adjustment of profitability is possible. The average (median) of ROA was 0.034 (0.034) and
the averages (medians) of debt ratio measuring the cash payment ability of firms and ROA
measuring effective operation of assets were 1.229 (1.112) and 1.045 (0.884) respectively.
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Proceedings of 3rd Asia-Pacific Business Research Conference
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In addition, the average (median) debt ratio which can measure firms’ dependence on
outside capital was 0.595 (0.590), which suggests the weight of liabilities out of total
assets is relatively high. Besides, the average (median) firm size and foreigners’ ownership
were 20.650 (20.585) and 0.138 (0.075), respectively.
<Table 3> Descriptive Statistics of corporate bonds-issued firms
Variable
Standard
Mean
Median
Minimum
Maximum
(N=1744)
Deviation
RANK
13.160
13.000
3.560
1.000
20.000
AWD
0.002
0.000
0.008
0.000
0.124
AROA
0.034
0.034
0.080
-0.448
0.421
CR
1.229
1.112
0.759
0.007
10.915
ATURNOVER
1.045
0.884
1.409
0.001
40.918
LEV
0.595
0.590
0.229
0.011
2.250
SIZE
20.650
20.585
1.539
15.325
24.972
FOR
0.138
0.075
0.158
0.000
0.875
AUD
0.993
1.000
0.083
0.000
1.000
NEGE
0.170
0.000
0.376
0.000
1.000
Variable definition: RANK = depending on corporate credit ratings granted to the score value by 1
score for 20 ratings, AWD = Asset Impairment / Total Assets, WD = If Asset Impairment recognition
is 1, and 0 otherwise, AROA = (Asset Impairment + Net Income) / Total Assets, CR = Current
Assets / Current Liabilities, ATURNOVER = Sales / Total Assets, LEV = Total Liabilities / Total
Assets, SIZE = Log of Total Assets, FOR = the ratios of foreigners’ ownership, AUD = If Qualified
Audit Opinion is 1, and 0 otherwise, NEGE = 1 when Net Income is negative, and 0 otherwise
4. 3 Analysis of Differences
Panel A in Table 4 is the result of difference analysis according to the recognition of asset
impairment. While the average of corporate bond credit ratings by recognition and nonrecognition of asset impairment did not show significant difference statistically, the median
showed significantly large value in the firms which recognized the asset impairment.
However, the averages and medians of both firm size and foreigners’ ownership showed
high values in firms which recognized the asset impairment, which shows firms with large
sizes and high foreigners’ ownership recognize the asset impairment. The average and the
median of debt ratio were high in firms which did not recognize the asset impairment.
According to the credit rating system of Panel B, ratings from AAA to BBB- which are
acknowledged to have the debt service ability investment-grade and the speculative-grade
from BB+ to D, which are largely affected by the environment change.
Recognition of asset impairment showed significantly large values in the speculativegrade, which implies groups with low corporate bond credit rating recognize the asset
impairment more. ROA, debt ratio, firm size and foreigners’ ownership of investment-grade
showed significantly larger values than speculative-grade and, ROA and the debt ratio had
significantly larger values in the speculative-grade.
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Proceedings of 3rd Asia-Pacific Business Research Conference
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<Table 4> Difference Analysis
Panal A Difference Analysis according to the recognition of asset impairment
Asset Impairment
Asset Impairment NonRecognition Firms
Recognition Firms
t-statistics z-statistics
Mean
Median
Mean
Median
RANK
13.427
14.000
13.090
13.000
1.599
2.409**
AROA
0.030
0.039
0.034
0.032
-0.859
1.220
***
CR
1.113
0.964
1.259
1.145
-3.253
-4.106***
ATURNOVER
1.011
0.892
1.054
0.882
-0.514
0.521
LEV
0.603
0.589
0.593
0.590
0.791
-0.156
***
SIZE
21.190
21.262
20.509
20.397
7.578
8.034***
FOR
0.164
0.114
0.131
0.063
3.553***
4.500***
AUD
0.980
1.000
0.996
1.000
-3.234***
-3.225***
NEGE
0.229
0.000
0.155
0.000
3.340***
3.728***
Panal B Difference Analysis according to the corporate bond credit ratings
INVESTMENT GRADE SPECULATIVE GRADE
(N=302)
(N=63)
t-statistics z-statistics
Mean
Median
Mean
Median
RANK
14.651
15.000
6.965
8.000
21.268***
12.026***
AWD
0.007
0.003
0.014
0.006
-3.532***
-7.806***
AROA
0.051
0.049
-0.079
-0.071
10.451***
3.444***
CR
1.149
0.994
0.920
0.747
2.365**
1.015
***
ATURNOVER
0.976
0.905
1.196
0.786
-2.610
2.552**
LEV
0.589
0.581
0.677
0.654
-2.482**
-7.237***
SIZE
21.464
21.529
19.743
19.501
9.211***
8.328***
FOR
0.186
0.143
0.045
0.005
6.158***
3.451***
AUD
0.997
1.000
0.895
1.000
5.278***
5.090***
NEGE
0.143
0.000
0.684
1.000
-10.084***
-9.723***
* See Table 3 for the definition of variables.
Superscript *,**,*** denote statistical significance at the 0.10, 0.05, 0.01 levels(two-tailed),
respectively.
4. 4 Correlation Analysis
<Table 5> is the results of the correlation analysis on firms which issued corporate bonds.
The top of the table is the results of correlation analysis on the speculative-grade and the
bottom shows the results of the analysis on investment-grade. The correlation coefficient
between the corporate bond credit rating and asset impairment recognition rate in
investment-grade shows the negative (-) correlation with 0.089 while it is -0.067 to show
statistically insignificant negative (-) correlation. That is, the more firms which recognized
the asset impairment, the higher the credit ratings of them are. On the other hand, the
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Proceedings of 3rd Asia-Pacific Business Research Conference
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correlation coefficient of ROA shows the positive correlation (+) with 0.351, which suggest
firms which have higher ROA before recognition of asset impairment achieve higher credit
ratings. In addition, the firm size, foreigners’ ownership, and audit opinion also showed a
positive (+) correlation, corporate bond credit ratings of firms with large size, high
foreigners’ ownership and unqualified audit opinion seem to be relatively high. Also, the
debt ratio and the negative (-) earnings showed the negative (-) correlation, which
suggests credit ratings of firms with high debt ratio and negative earnings are evaluated in
low.
In summary of the results of the correlation analysis, it was found the dependent
variables and explanatory variables designed in the research model are in close
explanatory relationships. That is, corporate bond credit ratings in the speculative-grade
had positive (+) relationships with ROA, firm size and foreigners’ ownership and negative
(-) correlations with the asset impairment, debt ratio and negative earnings. In the
speculative-grade, it showed positive correlations with ROA and audit opinions and
negative correlations with ROA, foreigners’ ownership and negative earnings.
<Table 5> Correlation Analysis
RANK
AWD AROA
-0.067 0.419***
RANK
AWD
-0.089***
AROA
0.351*** -0.029
ATURN
LEV
SIZE FOR AUD NEGE
OVER
0.045 -0.202*** -0.023 -0.028 -0.091* 0.245*** -0.267***
CR
-0.200*** -0.119** 0.034
0.122** 0.086 0.132** 0.156*** -0.013 0.233*** -0.688***
CR
0.032
-0.026 0.232***
ATURNOVER
-0.041
-0.010 -0.062** -0.005
LEV
SIZE
FOR
AUD
-0.023 0.119** 0.028 -0.231*** 0.226***
-0.015 -0.267***-0.274*** -0.107* 0.042 -0.235**
0.030 -0.057 -0.043 -0.153*** -0.041
-0.206*** 0.016 -0.179***-0.339*** 0.032
***
0.597
***
0.515
***
0.024
***
***
0.044 -0.260 -0.055 0.194
*
***
-0.045 0.318
0.037 -0.129
**
0.322*** 0.079
***
0.004
***
0.347
***
-0.009 -0.057 -0.108 0.480
0.022
0.002
-0.007 -0.025 0.021
0.038 -0.043
-0.023 -0.021
0.057
0.037
-0.212***
-0.211*** 0.114*** -0.565***-0.144*** 0.051 0.113*** 0.058** -0.127** 0.009
*The top of the table is the results of correlation analysis on the speculative-grade and the bottom
shows the results of the analysis on investment-grade.
**See Table 3 for the definition of variables.
Superscript *,**,*** denote statistical significance at the 0.10, 0.05, 0.01 levels(two-tailed),
respectively.
NEGE
4. 5 Regression Analysis
Table 6 is the result of hypothesis verification using the Ordered Logit Model (OLM) in
order to alleviate the problem of convenience for coefficient estimate value which can
appear in the analysis using the OLS in case of credit ratings measured by the ordinal
scale. As results of regression analysis to understand effects of asset impairment on
corporate bond credit rating, the corporate bond credit rating is a dependent variable and
the asset impairment recognition variable is a major explanatory variable. If AWD (WD), a
major explanatory variable affects significantly negatively, recognition of asset impairment
is to affect evaluation of corporate bond credit rating negatively and the hypothesis would
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be supported.
Panel A is the results of analyzing effects of asset impairment recognition on corporate
bond credit rating for the whole sample firms, and Panel B and C are results of analyzing
effects of asset impairment recognition on corporate bond credit rating in the investmentgrade and speculative-grade respectively. Impairment loss recognition ratio and the
regression coefficient in panel A showed significant negative (-) values with -17.528 (Wald
= -8.93) and -0.223 (Wald = -4.17) respectively. This means the corporate bond credit
rating drop due to recognition of asset impairment causes to show recognition of asset
impairment affects evaluation of corporate bond credit rating adversely and the hypothesis
was supported. Also, Pseudo R2 representing the goodness of fitness for the model was
significant in the prediction model. The signs of the control variables are consistent with
the results of previous studies to show significant positive values in the regression
coefficients of ROA, current ratio and total assets turnover ratio, it suggests the higher the
ROA which measures company performances, the current ratio which measures the cash
repayment ability and total assets turnover ratio which measures the effective operation
ability are, the higher credit ratings are evaluated. The coefficient values of foreigners’
ownership and audit opinion were found to have significant positive values and so the
credit rating were evaluated high when the foreigners’ ownership is high and the audit
opinion is unqualified. The firm size and the debt ratio affected evaluation of credit rating
significantly in the estimated direction and are financial variables with strong influence in
evaluating credit rating for these two variables have substantial relations with repayment
ability of the principal and interests after issuing bond. In the speculative-grade of Panel B,
the asset impairment recognition and the coefficient of recognition showed significance
negative (-) values with -33.446 (Wald = -16.37) and -0.210 (Wald = -3.03) respectively
and higher regression coefficient value than analysis results of Panel A. This means
recognition of asset impairment responded to evaluation of credit rating more negatively in
the speculative-grade where corporate bond credit ratings are good. While the asset
impairment recognition of the speculative-grades showed not significant positive value with
6.332 (Wald = 0.36), recognition of asset impairment showed not significant negative (-)
value with -0.181 (Wald = -0.39). That is, recognition of asset impairment of the
speculative-grades where credit ratings are poor shows the differentiated response from
the investment-grade with good credit rating. Recognition of asset impairment in the
speculative-grade, recognition of asset impairment is accepted as a signal of reducing
credit risks of firms by conservative accounting and affects evaluation of credit rating
positively６. Also, ROA, audit opinion, etc. were found to affect evaluation of credit rating
more significantly than recognition of asset impairment７. But the explanatory power of
speculative-grade was 41.4% less than the whole firms and investment-grade８.
６
７
８
When recognition on asset impairment is considered as strengthening conservative accounting
treatment, the transparency and trustworthy of firms might be heightened, contributing to firm
value enhancement and then favorable rating of credit rating agencies.
The regression analysis on speculative-grade of Panel C shows t-value of debt ratio in this
research model has a negative value of –0.112(-0.051) while the analysis after eliminating
NEGE, t-value of depth ration posts –3.576(-262.38). It is interpreted that NEGE offset the debt
ratio.
Even though it is not illustrated as a table, the issue of multi-collinearity among variables is not
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Proceedings of 3rd Asia-Pacific Business Research Conference
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To summarize above discussions, the better credit ratings are, the lower the asset impairment recognition is.
And it was found the higher ROA, the current ratio and total assets turnover ratio, firm size and the
foreigners’ ownership are, the better credit ratings are. Meanwhile, the higher the debt ratio and the negative
earnings are, the lower credit ratings were evaluated.
<Table 6> According to the Ordered Logit Model Analyzing effects of asset impairment recognition on corporate bond
９
credit rating
Panal A Whole Sample Firms
Wald
Statistics
Coefficient
AWD
-17.528
-8.926
Wald
Statistics
Coefficient
***
WD
***
**
-0.223
-4.167
8.693
116.917
***
AROA
8.755
118.426
CR
0.129
4.106
**
0.125
3.869
**
ATURNOVER
0.073
5.886
**
0.072
5.688
**
LEV
-3.586
-264.251
***
-3.595
-265.215
SIZE
1.138
702.824
***
1.142
695.572
FOR
3.089
72.637
***
3.112
73.839
***
AUD
2.637
22.456
***
2.672
23.587
***
NEGE
-0.794
-26.046
***
-0.817
-27.699
YR Dummies
Pseudo R
Not Reported
2
***
***
***
Not Reported
0.685
0.683
Panal B INVESTMENT GRADE FIRMS
Coefficient
AWD
WD
AROA
CR
ATURNOVER
LEV
SIZE
FOR
AUD
NEGE
YR Dummies
2
Pseudo R
９
-33.446
9.155
0.035
0.036
-3.417
1.069
2.922
14.147
-0.721
Wald
Statistics
-16.369
Coefficient
Wald
Statistics
***
***
72.146
0.264
1.279
***
-172.984
***
452.106
***
58.959
0.003
***
-13.765
Not Reported
0.627
-0.210
9.010
0.034
0.036
-3.418
1.066
2.992
15.046
-0.771
*
-3.025
***
70.396
0.241
1.248
***
-173.195
***
444.050
***
61.952
0.003
***
-15.922
Not Reported
0.624
serious biased on the analysis outcome of multi-collinearity of independent variables in the
process of multi regression analysis. The tolerance limit (VIF) was 1.093(0.915) in minimum and
3.301(0.303) in maximum and when VIF is 10 and over and tolerance limit is 0.1 and under, the
issue of multi-collinearity deems serious.
Credit rating agencies have notified that they utilize closing financial statement for recent 2 years
for credit rating evaluation. In this vein, the regression analysis outcome utilizing closing data in
t-1 year and t-2 year is similar enough not to give influence on the interpretation of study
outcome.
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Proceedings of 3rd Asia-Pacific Business Research Conference
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Panal C SPECULATIVE GRADE FIRMS
Coefficient
AWD
WD
AROA
CR
ATURNOVER
LEV
SIZE
FOR
AUD
NEGE
YR Dummies
Pseudo R2
6.332
8.036
0.114
-0.571
-0.112
-0.005
-1.579
1.405
0.156
Wald
Statistics
0.357
***
34.629
0.332
-14.541***
-0.051
-0.003
-0.985
5.590**
0.288
Not Reported
0.414
Coefficient
Wald
Statistics
-0.181
-0.391
7.827
33.032***
0.114
0.331
-0.558
-13.646***
-0.115
-0.053
0.015
0.021
-1.576
-0.974
1.296
4.898**
0.181
0.387
Not Reported
0.411
See Table 3 for the definition of variables.
Superscript *,**,*** denote statistical significance at the 0.10, 0.05, 0.01 levels(two-tailed),
respectively.
Ⅴ. Conclusion
This study analyzes the effect of asset impairment recognition on corporate bond credit
rating.
The major analysis results are as follows. First, the average (median) of corporate bond
credit rating were 13.160 (13.000) or BBB + rating as results of descriptive statistics
analysis for firms which issued corporate bonds. During the research period, more than
BBB-credit ratings were observed four times more than ratings under BB + grade, which
shows the credit rating agencies are providing relatively generous evaluation. Also, while
the mean of asset impairment recognition rate is 0.002, the maximum value was 0.124,
which shows some firms are recognizing large amount of asset impairment recognition.
Second, according to the analysis of differences in recognition and non-recognition of
asset impairment, the average of corporate bond credit rating did not show significant
difference by division of recognition and non-recognition of asset impairment but
recognition of asset impairment showed significant large value in the speculative-grade
according to the analysis results by dividing into the investment-grade and speculativegrade according to corporate bond credit rating for firms recognized the asset impairment,
which suggest the asset impairment is more recognized in the group with low corporate
bond credit rating. This corresponds to the results that firms with poor financial
performances recognize more asset impairment(Zucca and Cambell 1992). That is, it was
found that recognition of asset impairment is affecting negatively at the time of evaluating
corporate bond credit rating. Third, according to the regression analysis which investigated
effects of asset impairment recognition on corporate bond credit rating, recognition of
asset impairment showed a significant negative (-) value, which supported the hypothesis
recognition of asset impairment affects evaluation of corporate bond credit rating adversely.
Also, recognition of asset impairment in the speculative-grade is affecting negatively more
than the range of corporate bond credit rating. In firms where financial states are stable
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Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
and corporate bond credit ratings are good, recognition of asset impairment is
acknowledged as negative effects which cause to decrease earnings of firms and reduce
firm values. Therefore, the recognition of asset impairment has a negative impact on the
corporate bond credit rating. Meanwhile recognition of asset impairment in the speculativegrade does not affect corporate bond credit ratings significantly. For firms of which
financial conditions are unstable and of which corporate bond credit ratings are poor, the
ratios which can measure the debt service ability on borrowings are more useful in
evaluation of corporate bond credit rating than the recognition of asset impairment.
To summarize above discussions, it can be seen recognition of asset impairment
negatively affects the corporate bond credit rating. The better corporate bond credit ratings
of firms are, the less recognized asset impairment and the higher ROA, the current ratio,
the firm size and foreigners’ ownership are, the better the credit ratings are. Meanwhile the
corporate bond credit rating was evaluated low in firms with high asset impairment
recognition and high debt ratios.
The existing precedent studies relative to the asset impairment were mostly engaged in
understanding recognition cause of asset impairment and characteristics of firms which
recognizes the asset impairment or value relevance of asset impairment and earnings
management. Therefore, this study found out recognition of asset impairment affects
evaluation of corporate bond credit rating negatively through relationships between the
asset impairment and corporate bond credit rating.
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