Financial statement adjustments in credit rating analysis: evidence from IFRS and U.S. GAAP companies

Abstract

RESEARCH OBJECTIVES

This thesis examines the associations of a credit rating agency’s financial statement adjustments with corporate credit ratings. Firstly, the study aims at finding out whether the financial statement adjustments significantly influence credit ratings. Secondly, the thesis investigates whether the effects of the adjustments on credit ratings differ between IFRS and U.S. GAAP companies.

DATA

The data used in the empirical analysis is provided by a global credit rating agency, referred to as Credit Rating Agency X. The data consists of reported and adjusted financial statements as well as credit ratings from the time period 2004-2007. The final sample comprises of 963 companies from 42 countries and 17 industries. 20 percent of the final sample is IFRS observations whereas the mount of U.S. GAAP observations totals 80 percent.

EMPIRICAL ANALYSIS

The main empirical analysis is implemented by using a linear regression method. The effects of financial statement adjustments on credit ratings are analyzed by models comprising of adjustments to EBIT, total debt, interest expense as well as free cash flow and control variables. The effects of IFRS and U.S. GAAP adjustments on credit ratings are compared by constructing a model adding in interaction terms for IFRS dummy variable and the adjustments.

RESULTS

The results indicate that for the most part the financial statement adjustments do affect credit ratings. It appears that adjustments to EBIT and total debt are the most significant adjustment types. However, overall the effects appear to be fairly small suggesting that the adjustments are not highly material in determining credit ratings. It is also found that only the effects of EBIT adjustments on credit ratings differ between IFRS and U.S. GAAP. This implies that IFRS and U.S. GAAP provide financial information of equal quality.

KEY WORDS

Credit rating, financial statement adjustments, accounting quality, reporting standards, accounting standards, IFRS, U.S. GAAP