A study of corporate credit rating in Hong Kong

This project report includes 3 parts. The initial section presents the practices of credit rating and ranking organizations. A short overview of the present situation of credit rating in Hong Kong is presented as well. There are actually 3 main credit ranking agencies in the market, where Moody’s and Standard & Poor’s account for over 80% of the total credit rating issued for Hong Kong where lack of local credit rating agency

The next part reports the consequence of change in corporate credit rating on the company’s common stock price both before and after the announcement date in Hong Kong from 1990 to 2002. The outcomes suggest that credit downgrading is associated to adverse abnormal stock returns, and the effect of credit upgrading on stock returns were statistically insignificant. These bits of information are consistent with previous studies. However, there isn’t any proof of unnatural stock trading behavior both before and after the announcement of the change on a company’s credit ranking…

The ultimate segment looks at the predictability of the Probability of Default (PD) on the change of credit rating of a company. This dissertation uses the Black – Scholes – Merton option model which incorporates both financial statement and stock exchange data to estimate the PD of a company. The final results discovered that the alteration of PDs may be used to forecast the change of credit rating of a company in the coming year, and have higher predictive power on credit downgrading businesses…

Source: City University of Hong Kong

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