Credit Rating Credit Rating

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Master Thesis Final version

Yelena Rozhitsyna s1521373 60

FIGURES AND TABLES

Figure 1. Credit rating analysis

Figure 2. Conceptual Model

Effectiveness of decision-making

BOD Top Management

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Master Thesis Final version

Table 1. Credit rating classifications S&P’s Long-term

Issuer’s Credit Rating RATING RAT_DISCR RAT_DUM Grade

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Table 2. Descriptive Statistics

Skew ness Kurtosis Percentiles N _Vali d Mean Median Std. Deviation Variance statistic s Std. _Error statisti cs Std. _Error Minimum Max i mum 25 50 75 credit ratin g 20 04 281 6,356 6,000 1,073 1,151 -0,154 0,145 0,445 0,290 3,000 9,000 6,000 6,000 7,000

credit rating discrete [1;25]

281 16,107 16,000 3,172 10,060 -0,116 0,145 0,263 0,290 7,000 24,000 14,000 16,000 18,000 investme nt gra de ratin g 281 0,826 1,000 0,380 0,144 -1,726 0,145 0,985 0,290 0,000 1,000 1,000 1,000 1,000 size of the bo d 281 12,359 12,000 2,926 8,560 0,985 0,145 2,259 0,290 7,000 25,000 10,000 12,000 14,000 ceo-b od tenur e 281 1,220 0,880 1,162 1,351 2,096 0,145 6,449 0,290 0,000 8,180 0,430 0,880 1,580 boar d after ceo 281 60,159 60,000 30,568 934,418 -0,200 0,145 -1,083 0,290 0,000 100,000 36,360 60,000 89,735 ceo du alit y 281 0,786 1,000 0,411 0,169 -1,406 0,145 -0,024 0,290 0,000 1,000 1,000 1,000 1,000 bod i nde pe nde nce 281 80,861 83,330 11,062 122,368 -1,136 0,145 0,983 0,290 35,710 95,000 75,000 83,330 90,000 bod av erag e a ge 281 60,115 60,180 2,849 8,115 -0,307 0,145 1,104 0,290 49,630 69,670 58,260 60,180 62,035 bod e ducati on hetero gen eit y 281 0,697 0,650 0,318 0,101 0,464 0,145 0,436 0,290 0,000 1,890 0,480 0,650 0,890 bod n ation alit y hetero gen eit y 281 0,163 0,000 0,230 0,053 0,875 0,145 -0,867 0,290 0,000 0,780 0,000 0,000 0,410 directors net w ork 281 1,602 1,540 0,434 0,189 1,018 0,145 1,786 0,290 1,000 3,730 1,270 1,540 1,905 classifie d bo ar d 281 0,552 1,000 0,498 0,248 -0,209 0,145 -1,971 0,290 0,000 1,000 0,000 1,000 1,000 financi al ties 281 3,146 1,000 5,522 30,496 2,123 0,145 3,484 0,290 0,000 25,000 0,000 1,000 2,000 industr y sp ecifi c expertis e 281 0,957 1,000 0,203 0,041 -4,548 0,145 18,816 0,290 0,000 1,000 1,000 1,000 1,000 avera ge bo d te nure 281 7,957 7,640 3,238 10,483 0,865 0,145 2,054 0,290 1,000 24,000 5,920 7,640 9,730

firm size (log of

total assets 200 4) 261 7,221 7,180 0,588 0,345 0,783 0,151 0,643 0,300 5,910 9,170 6,765 7,180 7,505 firm diversificat ion in de x (Herfind ahl) 281 0,205 0,000 0,257 0,066 0,751 0,145 -1,082 0,290 0,000 0,780 0,000 0,000 0,440 industr y 281 4,331 4,000 2,534 6,422 0,183 0,145 -0,879 0,290 0,000 9,000 2,000 4,000 6,000 industr y i nstabi lit y 2 00 4

(coeff of sales variab)

281 245,508 184,116 163,573 26756,076 0,917 0,145 -0,625 0,290 78,055 552,158 127,663 184,116 269,057 Operatin g cash flo w 200 4 221 0,447 0,405 0,333 0,111 1,005 0,164 2,465 0,326 -0,400 1,639 0,249 0,405 0,636

Log of net cas

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Table 3. Spearman ran

k -order Correla tions predicted sig n credit rating 2004 credit rating discrete [1;25] investment grade rating classified board bod indepe ndence

size of the bod bod educati on heterogen eity bod nation ality heterogen eity bod averag e age directors network ceo-bod tenur e

credit rating discrete [1;25]

0,956 *** investme nt gra de ratin g 0,691 *** 0,661 *** classifie d bo ar d + -0,099 * -0,075 -0,018 bod i nde pe nde nce + 0,078 0,092 0,167 *** 0,142 ** size of the bo d ? 0,236 *** 0,246 *** 0,122 ** 0,021 0,108 * bod e ducati on hetero gen eit y - 0,114 * 0,136 ** 0,113 * -0,015 0,128 ** 0,227 *** bod n ation alit y hetero gen eit y + 0,133 ** 0,127 ** 0,011 0,088 0,069 0,316 *** -0,010 bod av erag e a ge ? 0,192 *** 0,178 *** 0,169 *** 0,002 0,220 *** 0,107 * 0,099 * -0,020 directors net w ork + 0,312 *** 0,360 *** 0,247 *** 0,036 0,327 *** 0,143 ** 0,499 *** 0,158 *** 0,190 *** ceo-b od tenur e - -0,020 -0,015 0,028 0,002 -0,096 -0,098 * -0,052 -0,183 *** -0,054 -0,117 ** boar d after ceo + -0,072 -0,067 -0,014 0, 008 -0,091 -0,089 -0,076 -0,182 *** -0,099 * -0,132 ** 0,873 *** ceo du alit y + 0,049 0,071 0,127 ** 0,019 0,167 *** 0,012 0,064 -0,037 0,105 * 0,217 *** 0,294 *** financi al ties + 0,365 *** 0,399 *** 0,228 *** 0,013 0,151 *** 0,388 *** 0,196 *** 0,077 0,191 *** 0,383 *** 0,123 ** firm diversificat ion in de x (Herfind ahl) ? 0,062 0,065 0,048 0,000 0,001 -0,030 0,091 0,160 *** -0,040 0,174 *** -0,116 ** industr y ? 0,021 0,035 0,051 -0,011 0,036 0,099 * -0,086 -0,024 0,025 -0,146 *** 0,032 industr y i nstabi lit y 2 00 4

- -0,068 -0,013 -0,017 -0,026 -0,160 *** 0,046 0,010 -0,112 * -0,032 -0,190 *** 0,118 **

net cash flo

w 2 004 + 0,184 *** 0,215 *** 0,120 * -0,031 0,076 0,192 *** 0,137 ** 0,192 *** 0,132 ** 0,216 *** 0,003

firm size (log of

total assets 200 4) + 0,396 *** 0,419 *** 0,246 *** -0,125 ** 0,204 *** 0,503 *** 0,278 *** 0,173 *** 0,203 *** 0,368 *** -0,029 avera ge bo d te nure + 0,279 *** 0,275 *** 0,223 *** -0,073 -0,183 *** -0,057 -0,119 ** -0,063 0,345 *** -0,063 0,054 industr y sp ecifi c exp ertise + 0,067 0,057 0,088 0,022 0,086 0,072 0,191 *** 0,116 ** 0,031 0,186 *** 0,020 Operatin g cash flo w 2 00 4 + 0,381 *** 0,401 *** 0,310 *** -0,126 * -0,046 0,092 0,077 -0,051 0,112 * 0,093 0,085

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Table 3. Spearman ran

k

-order Correla

tions (cont’d)

predicted sig n

board after ceo ceo duality financial ties firm diversification index (Herfindahl) industry industry instability 20 04 (coeff of sales variab)

net cash flow 2004

firm size (log of total assets 2004) average bo d tenure industry specific expertise OCF2004 ceo du alit y 0,281 *** financi al ties 0,133 ** 0,098 * firm diversificat ion in de x (Herfind ahl) -0,125 ** -0,018 -0,132 ** industr y 0,070 0,030 0,221 *** -0,106 * industr y i nstabi lit y 2 00 4

0,149 *** 0,023 0,125 ** -0,207 *** 0,128 **

net cash flo

w 2 004 -0,052 0,036 0,145 ** 0,135 ** -0,103 * -0,153 ***

firm size (log of

total assets 200 4) -0,013 0,122 ** 0,586 *** -0,006 0,303 *** -0,017 0,216 *** avera ge bo d te nure -0,096 -0,045 0,073 0,040 -0 ,005 0,062 0,052 -0,027 industr y sp ecifi c exp ertise -0,023 0,019 0,126 ** 0,014 -0,036 0,123 ** 0,120 ** 0,094 -0,045 Operatin g cash flo w 2 00 4 0,028 -0,040 0,068 0,013 0,015 -0,058 0,211 *** 0,169 *** 0,162 ** 0,114 *

Log of net cas

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Master Thesis Final version Yelena Rozhitsyna s1521373 65 A lte rn ati ve T a b le 4. L in ear reg res sio n s (dep en d en t R A T _DISCR) predicted sign Model 0 Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 Model 11 Model 12 Model 13 classifie d bo ar d + -1,248 -1,17 bod inde pe nde nce + -0,989 0,022 -0,334 size of the bo d ? -0,083 1,1 bod av erag e a ge ? 2,264 0,238 -0,072 directors net w ork + 2,781 3,145 3,622 bod e ducati on hetero gen eit y - -0,362 -1,518 -0,978 bod n ation alit y hetero gen eit y + -0,115 -0,245 0,212 ceo-b od tenur e - -0,347 -0,737 -0,745 boar d after ceo + 0,067 0,27 0,666 ceo du alit y + 1,480 1,685 1,077 industr y -2,264 -2,195 -2,266 -2,259 -2,205 -2,188 -2,126 -2,262 -2,222 -2,197 -1,554 -1,757 -2,172 -1,443

firm size (log of

total assets 200 4) + 8,223 6,562 8,213 8,199 7,450 7,705 7,036 7,64 7,384 7,505 5,917 6,002 7,384 4,373 firm diversificat ion in de x (Herfind ahl) + 1,455 1,556 1,401 1,45 1, 555 1,606 1,608 1,34 1,594 1, 56 1,086 1,178 1,55 0,829 industr y i nstabi lit y 2 00 4

- -0,965 -0,593 -0,933 -0,964 -0, 676 -0,747 -0,543 -0,99 -0,564 -0 ,604 -0,234 -0,038 -0,64 -0,557 avera ge bo d te nure + 5,833 5,828 5,816 5,158 5,405 Consta nt (Beta) -3,418 -0 ,911 -3,381 -3,436 -0.424 0,133 -8,589 -4,383 -0,979 -0,909 -0, 297 -1,33 -0,187 -1,435 signific anc e 0,123 0,699 0, 128 0,124 0,672 0,958 0, 037 0,114 0,674 0,696 0, 896 0,185 0,937 0,727 R-Squar e 0,296 0,202 0,296 0,296 0,209 0,205 0,218 0,306 0,202 0,202 0, 225 0,332 0,207 0,344 F-stat 21,42 1 12,89 7 17,80 9 17,78 2 13,44 5 13,14 1 14,18 11,00 6 12,92 8 12,89 9 14,83 3 15,65 7 13,28 6 8,582 signific anc e .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000

The Table reports t-stat for m

ultino

m

ial

linear regressions. Signi

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Master Thesis Final version Yelena Rozhitsyna s1521373 66 alternati ve Table 4. Ordinal Logit regressi ons (depende nt R A T_DISCR) predict ed sign Model 0 Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 Model 11 Model 12 Model 13 classifie d bo ar d + -0,101 -0,207 bod i nd epe nd e nce + -0,002 0,013 0 size of the bo d ? 0,025 0,084 bod av era ge a ge ? 0,057 -0,007 -0,038 directors net w ork + 0,927 0,872 1,366 bod e duc ation hetero ge neit y - -0,080 -0,538 -0,427 bod n atio nal ity hetero ge neit y + 0,533 0,048 0,488 ceo-b od ten ure - 0,882 0,553 -0,105 boar d after ceo + 0,02 0,001 0,006 ceo du alit y + 0,287 0,666 0,249 ind epe nd ents+ im port ant control -0,11 -0,003 -1,53 7.56 -0.895 0.005 -8,91 industr y -0,096 -0,088 -0,079 -0,079 -0,093 -0,088 -0,084 -0,084 -0,097 -0,089 -0,051 -0,058 -0,098 -0,049

firm size (log of

total assets 200 4) + 1,774 1,660 1,854 1,81 1,684 1,717 1,652 1,829 1,708 1,692 1,475 1,532 1,676 1,333 firm diversificat ion in dex (H er find ah l) + 1,026 1,374 1,327 1,222 1,394 1,314 1,414 1,356 1,06 1,041 1,193 1,241 0,959 1,282 ind ustr y i nstabi lit y 200 4 (coeff of sales varia b) - .117 (-).006 .016 .057 .035 .017 .001 .035 .028 .201 .036 (-).013 .173 .258 avera ge b od te nure + 0,18 0,325 0,352 0,261 0,23 Pseud o R-squ are (Nag elkerk e) 0,312 0,245 0,341 0,329 0,243 0,244 0,251 0, 346 0,242 0,244 0,271 0,274 0,243 0,374 Wald statistics 0,218 1,060 0 0,243 1. 882 0,799 1,1 0,246 0,230 0, 252 1,199 0.277 0,292 0,188 signific anc e 0,641 0,303 0,995 0,622 0,17 0,372 0,294 0, 607 0,632 0,616 0,274 0,598 0,589 0,664

The Table reports param

et

ers esti

m

ates

and Wald statistics for

industry instability (param eter s esti m at es ar e less than 0.000). Significance at the 0.1, 0.0 5 and 0. 01 le ve

ls is indicated as following, respectively

:

0,1

0,05

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Master Thesis Final version Yelena Rozhitsyna s1521373 67 T ab le 5. Ord inal L o g it reg ressio n s (d ep en d en t R A T ING) pred icted sign Model 0 Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 Model 11 Model 12 Model 13 classifie d bo ar d + -0,2 -0,317 bod i nd epe nd e nce + -0,005 0,008 -0,001 size of the bo d ? 0,024 0,062 bod av era ge a ge ? 0,067 0,007 -0,014 directors net w ork + 0,704 0,801 1,08 bod e duc ation hetero ge neit y - -0,219 -0,500 -0,422 bod n atio nal ity hetero ge neit y + 1.134 0.429 0,369 ceo-b od ten ure - 0.818 0,458 -0,154 boar d after ceo + 0,017 0,003 0,006 ceo du alit y + 0,371 0,559 0,185 Indep en dents* im porta nt control -0.105 -0.002 -1,43 -0.001 -2.571 0.002 -8,91 industr y -0,099 -0,093 -0,083 -0,085 -0,086 -0,092 -0,092 -0,092 -0,095 -0,072 -0,064 -0,070 -0,105 -0,07

firm size (log of

total assets 200 4) + 1,766 1,672 1,829 1,785 1,680 1,732 1,637 1,802 1,752 1,714 1,555 1,605 1,659 1,376 firm diversificat ion in dex (H er find ah l) + 1,189 1,51 1.413 1,325 1,312 1,473 1,478 1,433 1,561 2.139 1,484 1,451 0,942 1,016 ind ustr y i nstabi lit y 200 4 (coeff of sales varia b) - -0,001 0 -0,001 -0,001 0 -0,001 0 0 -8.07 0 0 0 -0,001 0 avera ge b od te nure + 0,185 0,322 0,319 0,254 0,217 Pseud o R-squ are (Nag elkerk e) 0,307 0,243 0,334 0,318 0,247 0,243 0,25 0, 336 0,245 0,254 0,258 0,264 0,242 0,348 W ald statistics 0,646 1, 688 0,000 0.000 1,274 1,372 1,367 0,234 0,508 0.296 2,348 0.432 0,347 0,169 signific anc e 0,422 0,194 0,988 0,994 0,259 0,242 0,242 0,629 0,476 0,586 0,125 0,517 0,556 0,681

The Table reports para

m et ers esti m ate s. Significance at the 0.1, 0.0 5 and 0. 01 le ve

:

0,1

0,05

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Master Thesis Final version Yelena Rozhitsyna s1521373 68 Ta ble 6 . Bina ry logis tic s re g re s si ons (de p ende nt R A T_DUM) predicte d sign Model 0 Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 Model 11 Model 12 Model 13 classifie d bo ar d + 0,105 -0,134 bod i nde pe nde nce + 0,032 0,053 0,055 size of the bo d ? 0,062 0,121 bod av erag e a ge ? 0,088 -0,06 -0,088 directors net w ork + 1,322 1,445 1,137 bod e ducati on hetero gen eit y - -0,581 -0,368 -0,13 bod n ation alit y hetero gen eit y + 0,474 -0,026 -0,508 ceo-b od tenur e - 1,136 -0,013 -0,051 boar d after ceo + 0,026 0,004 0,005 ceo du alit y + 0,746 0,448 0,215 inde pe nde nts*i m portant control -0,136 -0,003 0.000 0,003 -2,225 -0,015 0 industr y -0,061 -0,037 -0,034 -0,049 -0 ,038 -0,039 -0,04 -0,033 -0,041 -0,032 0,011 -0,023 -0,056 -0,001

firm size (log of

total assets 200 4) + 1,691 1,443 1,808 1,747 1,475 1,411 1,429 1,604 1,54 1,627 1,189 1,302 1,538 1,099 firm diversificat ion in de x (Herfind ahl) + 1,019 2,157 1,902 1,449 1,935 1,768 1,769 2,208 1,756 2,31 1,915 1,712 1,016 1,947 industr y i nstabi lit y 2 00 4

- 0 0,001 0 0 0, 001 0,001 0,001 0,001 -0,001 0,001 0,001 0,001 0 0,001 avera ge bo d te nure + 0,236 0,424 0,459 0,312 0,356 R-squar e (Nag elkerke) 0,225 0,142 0,248 0,243 0,155 0,16 0,148 0, 285 0,141 0,147 0,169 0,18 0,132 0,321 Wald statistics 1,167 1,704 0,08 1,181 2,149 0,709 0,642 0, 106 0,097 0,315 1, 659 0,092 0 1,845 signific anc e 0,28 0,192 0,777 0,277 0,143 0,4 0,423 0,744 0,755 0,574 0,198 0,762 0,997 0,174

The Table reports para

m et ers esti m ate s. Significance at the 0.1, 0.0 5 and 0. 01 le ve

:

0,1

0,05

(10)

Master Thesis Final Version

Equation 2

Table 7. Ordinal Logit regressions (dependent RAT_DISCR)

predi

cted

sign

Model 1 Model 2 Model 3 Model 4

directors network ₊ _1,073*** _0,506

financial ties ₊ _0,085 _0,037

operating cash flow 2004 ₊_1,635*** _1,382***

Directors’ network*financial ties _-0,039

Directors’ network*financial

ties*operating cash flow 2004 0,147

industry _-0,084* _-0,121*** _{-0,048 -0,078}

firm size (log of total assets 2004) + 1,711*** 1,758*** 1,326*** 1,301***

firm diversification index (Herfindahl) + 1,445** 0,302 1,271** 0,774

industry instability 2004 (coeff of sales

variab) - 8,029 0 0 0

Pseudo R-square (Nagelkerke) 0,245 0,272 0,276 0,309

Wald statistics _1,253 _0,584 _0,001 _0,063

significance _0,263 _0,445 _0,978 _0,801

The Table reports parameters estimates. Significance at the 0.1, 0.05

and 0.01 levels is indicated as following, respectively: *0,1 **0,05 ***0,01

alternative Table 7a. Binary Logistic regressions (dependent RAT_DUM)

predi

cted

sign

Model 1 Model 2 Model 3 Model 4

directors network ₊ _1,088 _1,294*

financial ties ₊ _-0,021 _0,344

operating cash flow 2004 ₊_2,756*** _3,387***

Directors’ network*financial ties _0,091

Directors’ network*financial ties*operating

cash flow 2004 -0,186

industry _-0,041 _-0,073 _-0,002 _0,003

firm size (log of total assets 2004) + 1,539*** 1,164** 0,821* 0,501

firm diversification index (Herfindahl) + 1,739 0,509 1,7** 2,064*

industry instability 2004 (coeff of sales variab) _{- 0,001} ₀ _{0,001 0,001}

Pseudo R-square (Nagelkerke) 0,135 0,238 0,179 0,281

Wald statistics _0,645 _1,022 _0,172 _0,25

significance _0,422 _0,312 _0,678 _0,617

The Table reports parameters estimates. Significance at the 0.1, 0.05

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Master Thesis Final Version Yelena Rozhitsyna s1521373 70 Equation 3 Table 8. Linear regressions (depe ndent OCF20 04) predicted sign Model 0 Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 Model 11 Model 12 Model 13 Model 14 Model 15 classified board - -1,179 -1,346 bod independenc e + -0,852 0,252 0,213

size of the bod

+ 0,463 1,281 bod average age + 0,926 0,432 0,181 directors net w ork + 0,751 0,476 1,427 0,756

bod education heterogen

eit y - 0,797 0,454 0,594 bod nationalit y heterogen eit y + -1,267 -1,185 -0,879 ceo-bod tenu re + 1,791 1,987 2,111 board afte r ceo + 0,763 -0,399 -0,349 ceo duality + -2,126 -2,505 -2,659 financial ties - 0,088 -0,137 industr y - -0,214 -0,235 -0,156 -0,196 -0,253 -0,258 -0,236 -0,116 -0,089 -0,318 -0,088 -0,093 -0,24 0,425 -0,26 -0,076

firm size (log of total assets 2004)

+ 2,29 1,682 2,353 2,317 2,422 2,289 1,919 2,417 1,824 2,382 1,63 1,729 1,971 0,571 2,047 1,625 fir m diver sificatio n index (H erfindahl ) + -0,12 0,038 0,087 -0,038 -0,029 0,028 0,047 0,127 -0,061 0,173 -0,062 0,069 0,035 0,142 0,019 -0,078 industry instability 2004 (coeff of sal es variab) - -0,928 -0,786 -1,063 -1,013 -0,656 -0,889 -0,746 -0,859 -0,843 -0,898 -0,654 -0,85 -0,803 -0,94 -0,762 -0,648 average bod t en ure + 2,608 2,455 2,661 1,843 2,014 Constant -1,3 -0,73 -1,448 -1,409 -0,825 -0,52 -1,246 -1,312 -0,678 -1,434 -0,678 -0,769 -0,542 -0,546 -0,775 -0,69 significance 0,195 0,466 0,149 0,16 0,410 0,603 0,214 0,191 0,498 0,153 0,499 0,443 0,588 0,585 0,439 0,491 R-Squar e 0,036 0,029 0,072 0,061 0,048 0,032 0,032 0,102 0,031 0,036 0,031 0,039 0,035 0,131 0,028 0,031 F-s tat 2,657 1,301 2,772 2,307 2,187 1,406 1,433 2,384 1,387 1,588 1,373 1,224 1,543 2,051 1,258 1,142 significance 0,024 0,265 0,013 0,035 0,057 0,223 0,213 0,011 0,23 0,165 0,236 0,291 0,178 0,014 0,283 0,339

ultino

m

ial

linear regressions. Signi

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Master Thesis

Final Version

71

Equation 4

Table 9. Linear regressions (dependent NET

CASH2004) predicted sign Model 1 Model 2a Model 2b Model 2c Model 3 Model 4a Model 4b Model 4c Model 5 Model 6 directors net work + 1,325 1,109 1,211 1,369 1,154 financial ties + 2,659*** 2,582*** 2,613*** 2,676*** 2,580*** credit rating 2004 + 0,977 0,677 rating discre te 2004 + 1,403 1,047

investment grade rating 2004

+ -0,108 -0,427 industry -1,582 -1,368 -1,427 -1,581 -1,526 -1,404 -1,437 -1,529 -1,296 -1,843*

firm size (lo

g of total asset s 2004) + 5,734*** 4,582*** 4,785*** 5,580*** 2,195** 1,877* 1,954** 2,223** 4,755*** 2,866*** firm diversificatio n index (Herfindahl) + 1,016 0,892 0,930 1,020 1,322 1,249 1,271 1,348 0,798 1,552 industry inst ability 2004 (coeff of sales v ariab ) - -0,153 -0,089 -0,076 -0,153 -0,171 -0,142 -0,128 -0,169 -0,012 -0,328 R-square 0,122 0,129 0,126 0,122 0,151 0,155 0,152 0,152 0,127 0,145 F-statisti cs 8,776 7,441 7,210 6,995 7,406 6,507 6,399 6,353 7,296 8,510 significance 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000

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Master Thesis

Final Version

72

Table 10. Linear regr

essi ons (de p end ent LO GNC0 4) predicted sign Model 1 Model 2a Model 2b Model 2c Model 3 Model 4a Model 4b Model 4c Model 5 Model 6 dire ctors net work + 2,193** 1,935* 2,022** 2,159** 2,199** financi al ties + -0,656 -0,744 -0,721 -0,657 -0,653 cre dit rating 2 004 + 1,058 0,753 rating di scret e 2004 + 1,301 0,918 investment g rade rating 20 04 + 0,327 0,093 indu stry -3,007 *** -2,912 *** -2,938 *** -3,003 *** -2,433 ** -2,404 ** -2,409 ** -2,427 ** -2,484 *** -2,952 *** firm s ize (log of total assets 2 004 ) + 8,964*** 7,702*** 7,940*** 8,693*** 6,091*** 5,824*** 5,869*** 6,045*** 7,402*** 7,049*** firm diversifi cation index (Herfin dahl) + 2,002** 1,799* 1,850* 1,950** 1,450 1,317 1,348 1,403 1,646* 1,792*

industry instability 2004 (co

eff of sale s va riab ) - -2,428 ** -2,404 ** -2,331 ** -2,416 ** -2,152 ** -2,142 ** -2,086 ** -2,144 ** -2,223 ** -2,355 ** R-squ ar e 0,394 0,400 0,398 0,394 0, 413 0,416 0,415 0,413 0,411 0,395 F-stati stics 26,634 21,735 7,210 21,212 18, 982 16,375 16,308 16,172 22,772 21,318 signifi can ce 0,000 0,000 0,000 0,000 0, 000 0,000 0,000 0,000 0,000 0,000

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73

APPENDICES APPENDIX A

Credit Rating Policy of Standard & Poor’s Rating Agency

Rating Process: Standard & Poor’s provides a rating only when there is adequate information

available to form a credible opinion, and only after applicable quantitative, qualitative, and legal analyses are performed. The analytical framework is divided into several categories to ensure that salient qualitative and quantitative issues are considered. For example, with industrial companies, the qualitative categories are oriented to business analysis, such as the company’s competitiveness within its industry and the caliber of management; the quantitative categories relate to financial analysis.

The rating process is not limited to an examination of various financial measures. Proper assessment of credit quality for an industrial company includes a thorough review of business fundamentals, including industry prospects for growth and vulnerability to technological change, labor unrest, or regulatory actions. In the public finance sector, this involves an evaluation of the basic underlying economic strength of the public entity, as Ill as the effectiveness of the governing process to address problems. In financial institutions, the reputation of the bank or company may have an impact on the future financial performance and the institution’s ability to repay its obligations.

Credit ratings often are identified with financial analysis, and especially ratios. But it is critical to realize that ratings analysis starts with the assessment of the business and competitive profile of the company. Two companies with identical financial metrics are rated very differently, to the extent that their business challenges and prospects differ.

Standard & Poor’s corporate credit rating: It is a current opinion on an issuer’s overall

capacity to pay its financial obligations—i.e., its fundamental creditworthiness. This opinion focuses on the issuer’s ability and willingness to meet its financial commitments on a timely basis. It generally indicates the likelihood of default regarding all financial obligations of the company.

Corporate credit analysis factors: There are several categories underlying both the business

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74 and Financial risk (Accounting, Corporate governance/Risk tolerance/Financial policies, Cash-flow adequacy, Capital Structure/Asset Protection, Liquidity/Short-term factors).

The linkages between credit quality and corporate governance —or, more correctly, certain elements of corporate governance —can be extensive. The following elements of corporate governance traditionally have formed part of ratings analysis: Ownership, Control, Management and Organization, Policies and Strategies, Information Disclosure and Financial Transparency and Intercompany and Affiliated Party Transactions. The significance of each element as a rating factor can vary greatly.

A component of corporate governance that historically has not figured prominently in the rating process is board structure and involvement. Of course, if it is evident a company’s board of directors is passive and does not exercise the normal oversight, it weakens the checks and balances of the organization and represents a negative credit factor. But considerations such as the proportion of independent members on the board of directors, presence of independent directors in board level audit committee, and direct reporting of internal auditor to board or independent internal audit committee at board level have not been systematically examined.

Long-Term Issuer Credit Ratings AAA

An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's.

AA

An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.

A

An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

BBB

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75

BB, B, CCC, and CC

Obligors rated 'BB', 'B', 'CCC', and 'CC' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'CC' the highest. While such obligors will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

BB

An obligor rated 'BB' is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitments.

B

An obligor rated 'B' is more vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.

CCC

An obligor rated 'CCC' is currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.

CC

An obligor rated 'CC' is currently highly vulnerable.

Plus (+) or minus (-)

The ratings from 'AAA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

R

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76

APPENDIX B. Variables Definitions

Variables Predicted _sign Definitions

Dependent variables

RATING Credit rating (S&P’s) – ordinal variable taking values from 1 (R -

obligor under regulatory supervision) to 9 (AAA) (see Table 1)

RAT_DISCR Credit rating discrete variable taking values from 1 to 25 as shown in

Table 1

RAT_DUM Credit rating dummy variable taking value of 1 if a company’s credit

rating is of investment grade and 0 otherwise (see Table 1) LOGNC04

+ Cash flow for 2004, continuous variable – log of Net Cash Flow item _{from companies’ Cash Flow Statements}

OCF2004

+

Operating cash flow - An alternative measure of firms’ liquidity showing companies’ ability to generate the resources needed to meet their current liabilities. OCF is computed by dividing cash flow from operations by current liabilities (Mills & Vamamura, 1998)

Independent variables

BOD_IND

+

Board independence index calculated as a percentage of the BOD comprised of outside independent directors. Due to the limited access to information it is not always possible to identify all existing financial or family ties between directors and the firms in focus and I had to rely on data provided in the companies’ proxy statements. As a result of the mentioned limitation the definition of independence here may not fully correspond to one used in the Sarbanes-Oxley Act of 2002 or accepted by the NYSE or SEC.

BOD_SIZE

+

Total number of directors. Alternate directors are not taken into account. When a CEO was replaced by a newcomer (a person who had not been a director before he/she was appointed as a new CEO) and if this happened before or on June 30, 2004, I took into account the data on the newcomer, while if this event occurred after June 30, 2004, data on the retired CEO was considered.

BOD_EDU

+

Board education heterogeneity index calculated as the Theil index in

accordance with the following formula:

( ) ( )

(

)

[

]

∑

= − = n i i i i w p p EDU BOD 1 ln ln _ , where n is a number of

different areas of all directors’ education and/or expertise; pi

represents the proportion of total number of directors in education field i (calculated as the number of directors with education or expertise in a given education field divided by the total number of

directors in the BOD); and wi indicates the proportion that each

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77 of person’s education (engineering, business, law, medicine, arts, social sciences, sciences and other).

“The Theil index is a heterogeneity measure that provides a measure of the discrepancies between the distributions of a resource within a population” (Wilson & Lockshin, 2002). Put it differently, this is a measure of population heterogeneity weighted by the parameter of interest, in our case, number of different areas of all directors’ education and/or expertise. The Theil index ranges from 0 for no heterogeneity to 1 indicating the highest possible heterogeneity. BOD_NATION

+

Board nationality heterogeneity index calculated as the Theil index in

accordance with the following formula:

( ) ( )

(

)

[

]

∑

= − = n i i i i p w p NATION BOD 1 ln ln _ , where n is a number of

different countries of all directors’ residence; pi represents the

proportion of total number of directors residing in country i (calculated as the number of directors residing in a given country

divided by the total number of directors in the BOD); and wi indicates

the proportion that each country of residence represents in the sample (calculated as entity divided by the total number of different countries of all directors’ residence). Different countries of all directors’ residence were coded in accordance with the list of the countries (APPENDIX C))

DIR_NET ₊ Centrality index calculated as an average number of all directors’

appointments

BOD_AGE + Board age variable calculated as average age of all directors

CEO_BOD_TEN

-

CEO’s tenure vis-à-vis BOD’s tenure - calculated by dividing CEO’s tenure by average tenure of the BOD (this average does not include tenure of the CEO). If there was a change of CEO in 2004, I took into account data attributed to the person who was the CEO for more than 6 month in 2004. When a CEO was replaced by a newcomer (a person who had not been a director before he/she was appointed as a new CEO) and if this happened before or on June 30, 2004, I took into account the data on the newcomer, while if this event occurred after June 30, 2004, data on the retired CEO was considered.

BODAFTERCEO -

Portion of the board appointed after or in the same year as the CEO - calculated as a number of directors appointed after or in the same year as the CEO divided by the total number of directors without CEO (or both the predecessor CEO and the successor CEO when the latter one is a newcomer).

DUALITY _- CEO duality – is a dummy variable taking value of 1 when CEO

serves as a chairman of the board and 0 otherwise

STAG_BOD ₊ Staggered board - dummy variable taking value of 1 if there is more

than one class of directors in the company and 0 otherwise

FIN_TIES ₊ Nominal continuous variable defining total number of a firm’s ties

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78 directors appointments as a director or CEO in BODs of financial institutions. For financial institutions themselves this number equals total number of directors plus number of ties to other financial institutions, if any.

AVBODTEN ₊ Average BOD tenure. Measured as an average tenure of all board

members. EXPINDSP

+

Industry-specific expertise. A dummy variable taking value of 1 if at least one of the board members possesses industry-specific expertise and 0 otherwise.

Independent control variables

INDUSTRY

?

Nominal variable taking values from 0 to 9 depending on the industry a firm operates in (0energy, 1materials, 2industrials, 3consumer discretionary, 4consumer staples, 5health care, 6financials, 7information technology, 8telecommunication service, 9utilities)

DIVERS

+

Diversification index calculated as a Herfindahl index (i.e. the sum of squared proportions) on the spread of firm sales in five different geographic segments (the US, Europe, Asia/Pacific, Latin America and the rest of the world); a positive measure of diversification is obtained by subtracting the Herfindahl index from 1 (Boone et al., 2004)

LOGASSET

+ Size of company measured as log of total assets (e.g. Ashbaugh et al, 2004). Alternative measure of firm size is log of sales (Westphal,

1998). IND_STAB

-

Index of industry stability. Measured as a coefficient of variation of sales and calculated with help of the following formula:

100 * _ X S STAB

IND ₌ x _{, where Sx is the standard deviation of sales}

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79

APPENDIX C.

List of the Countries

1 Afghanistan 115 Guatemala 230 Oregon

2 Alabama 116 Guinea 231 Pakistan

3 Alaska 117 Guinea-Bissau 232 Palau

4 Albania 118 Guyana 233 Panama

5 Alberta 119 Haiti 234 Papua New Guinea

6 Algeria 120 Hawaii 235 Paracel Islands

7 American Samoa 121

Heard and McDonald

Islands 236 Paraguay

8 Andorra 122 Honduras 237 Pennsylvania

9 Angola 123 Hong Kong 238 Peru

10 Anguilla 124 Hungary 239 Philippines

11 Antarctica 125 Iceland 240 Pitcairn Island

12 Antigua and Barbuda 126 Idaho 241 Poland

13 Argentina 127 Illinois 242 Portugal

14 Arizona 128 India 243 Portuguese Timor

15 Arkansas 129 Indiana 244 Prince Edward Island

16 Armenia (Republic) 130 Indonesia 245 Puerto Rico

17 Armenian S.S.R. 131 Iowa 246 Qatar

18 Aruba 132 Iran 247 Québec (Province)

19

Ashmore and Cartier

Islands 133 Iraq 248 Réunion

20 Australia 134 Iraq-Saudi Arabia Neutral Zone 249 Rhode Island

21 Austria 135 Ireland 250 Romania

22 Azerbaijan 136 Israel 251 Russia

23 Bahamas 137

Israel-Jordan

Demilitarized Zones 252 Rwanda

24 Bahrain 138 Israel-Syria Demilitarized Zones 253 Ryukyu Islands, Southern

25 Bangladesh 139 Italy 254 Saint Helena

26 Barbados 140 Jamaica 255 Saint Kitts-Nevis

27 Belarus 141 Jan Mayen 256 Saint Kitts-Nevis-Anguilla

28 Belgium 142 Japan 257 Saint Lucia

29 Belize 143 Johnston Atoll 258 Saint Pierre and Miquelon

30 Benin 144 Jordan 259 Saint Vincent and the Grenadines

31 Bermuda Islands 145 Kansas 260 Samoa

32 Bhutan 146 Kazakhstan 261 San Marino

33 Bolivia 147 Kentucky 262 Sao Tome and Principe

34 Bosnia and Hercegovina 148 Kenya 263 Saskatchewan

35 Botswana 149 Kiribati 264 Saudi Arabia

36 Bouvet Island 150 Korea (North) 265 Scotland

37 Brazil 151 Korea (South) 266 Senegal

38 British Columbia 152 Kuwait 267 Serbia and Montenegro

39 British Indian Ocean Territory 153 Kyrgyzstan 268 Seychelles

40 British Virgin Islands 154 Laos 269 Sierra Leone

41 Brunei 155 Latvia 270 Sikkim

42 Bulgaria 156 Latvia 271 Singapore

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80

44 Burma 158 Lesotho 273 Slovenia

45 Burundi 159 Liberia 274 Solomon Islands

46 Byelorussian S.S.R. 160 Libya 275 Somalia

47 California 161 Liechtenstein 276 South Africa

48 Cambodia 162 Lithuania 277 South Carolina

49 Cameroon 163 Lithuania 278 South Dakota

50 Canada 164 Louisiana 279

South Georgia and the South Sandwich Islands

51 Canada 165 Luxembourg 280 Soviet Union

52 Canal Zone 166 Macao 281 Spain

53

Canton and Enderbury

Islands 167 Macedonia 282 Spanish North Africa

54 Cape Verde 168 Madagascar 283 Spratly Island

55 Cayman Islands 169 Maine 284 Sri Lanka

56 Central African Republic 170 Malawi 285 Sudan

57 Central and Southern Line Islands 171 Malaysia 286 Surinam

58 Chad 172 Maldives 287 Svalbard

59 Chile 173 Mali 288 Swan Islands

60 China 174 Malta 289 Swaziland

61 Christmas Island (Indian Ocean) 175 Manitoba 290 Sweden

62 Cocos (Keeling) Islands 176 Marshall Islands 291 Switzerland

63 Colombia 177 Martinique 292 Syria

64 Colorado 178 Maryland 293 Tajikistan

65 Comoros 179 Massachusetts 294 Tanzania

66 Congo (Brazzaville) 180 Mauritania 295 Tennessee

67 Congo (Democratic Republic) 181 Mauritius 296 Terres australes et antarctiques françaises

68 Connecticut 182 Mayotte 297 Texas

69 Cook Islands 183 Mexico 298 Thailand

70 Costa Rica 184 Michigan 299 Togo

71 Côte d'Ivoire 185

Micronesia (Federated

States) 300 Tokelau

72 Croatia 186 Midway Islands 301 Tonga

73 Cuba 187 Minnesota 302 Trinidad and Tobago

74 Cyprus 188 Mississippi 303 Trust Territory of the Pacific Islands

75 Czech Republic 189 Missouri 304 Tunisia

76 Czechoslovakia 190 Moldova 305 Turkey

77 Delaware 191 Monaco 306 Turkmenistan

78 Denmark 192 Mongolia 307 Turks and Caicos Islands

79 District of Columbia 193 Montana 308 Tuvalu

80 Djibouti 194 Montserrat 309 Uganda

81 Dominica 195 Morocco 310 Ukraine

82 Dominican Republic 196 Mozambique 311 United Arab Emirates

83 East Timor 197 Namibia 312 United Kingdom

84 Ecuador 198 Nauru 313

United Kingdom Misc. Islands

85 Egypt 199 Nebraska 314 United States

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81

88 Equatorial Guinea 202 Netherlands Antilles 317 Uruguay

89 Eritrea 203 Nevada 318 Utah

90 Estonia 204 New Brunswick 319 Uzbekistan

91 Ethiopia 205 New Caledonia 320 Vanuatu

92 Falkland Islands 206 New Hampshire 321 Various places

93 Faroe Islands 207 New Jersey 322 Vatican City

94 Fiji 208 New Mexico 323 Venezuela

95 Finland 209 New York (State) 324 Vermont

96 Florida 210 New Zealand 325 Vietnam

97 France 211 Newfoundland and Labrador 326 Vietnam, North

98 French Guiana 212 Nicaragua 327 Vietnam, South

99 French Polynesia 213 Niger 328

Virgin Islands of the United States

100 Gabon 214 Nigeria 329 Virginia

101 Gambia 215 Niue 330 Wake Island

102 Gaza Strip 216 No place, unknown, or undetermined 331 Wales

103 Georgia 217 Norfolk Island 332 Wallis and Futuna

104 Georgia (Republic) 218 North Carolina 333 Washington (State) 105 Germany 219 North Dakota 334 West Bank of the Jordan River 106 Germany (East) 220 Northern Ireland 335 West Berlin

107 Ghana 221 Northern Mariana Islands 336 West Virginia 108 Gibraltar 222 Northwest Territories 337 Western Sahara 109 Gilbert and Ellice Islands 223 Norway 338 Wisconsin

110 Greece 224 Nova Scotia 339 Wyoming

111 Greenland 225 Nunavut 340 Yemen

112 Grenada 226 Ohio 341 Yukon Territory

113 Guadeloupe 227 Oklahoma 342 Zambia

114 Guam 228 Oman 343 Zimbabwe