This dissertation examines the effects of cash holdings and patents on credit ratings for firms listed on the Korea Exchange (KRX). Our sample is 3,010 firm-years over period 2000-2016. We employ an ordered probit model according to Blume et al. (1998) and Alp (2013).
Chapter 2 investigates the impact of cash holdings on credit ratings. Cash holdings decrease the default risk but reduce profitability. The empirical results are as follows. First, cash holdings raise credit ratings. Cash holdings play a major role in buffering firms from profitability shocks that may negatively affect debt payment (Bates et al., 2009; Alp, 2013; Baghai et al., 2014). It reduces default risk and then raises the credit rating. Second, the positive effect of cash holdings on credit ratings increases at a decreasing rate as cash holdings increase. This implies that the cash holdings held by firms may have an optimal level based on marginal benefits and marginal costs (Ferreira and Vilela, 2004), which also applies to credit rating. Third, cash holdings raise credit ratings for investment grades but not for speculative grades. Cash holdings of firms with low credit risk reduce the likelihood of default by protecting the company against profitability shocks that would negatively impact debt repayment. Fourth, cash holdings increase the credit ratings of both Chaebol and non-Chaebol firms. Especially, in case of Chaebol firms, cash holdings lower than median lead to higher credit ratings. In case of non-Chaebol firms, cash holdings greater than median lead to higher credit ratings. This implies that the existence of tunneling effect may have an effect on rating credit for Chaebol firms. Fifth, the positive effects of cash holdings are greater after the financial crisis. This result suggests that the importance of cash holdings has been highlighted because of the lack of liquidity resulting from the financial crisis.
Chapter 3 examines the effect of patents on credit ratings. Patents may generate future cash flows but involve costs. The main results are as follows. First, the patent increases the credit ratings. This implies that patents may contribute to reducing default risk by acknowledging future cash flows of patents. Second, patents of investment grade firms raise credit ratings but those of speculative grade firms lower credit ratings. It implies that activities acquiring patents of firms with speculative grades may be overdone considering cash needed for these firms. Third, patents of Chaebol firms increase their credit ratings but those of non-Chaebol firms have no effect on credit ratings. This implies that the patents of Chaebol firms may induce more future cash flows through their affiliates compared to non-Chaebol firms with no or few affiliates.
This dissertation first explores in detail how cash holdings and patents affect their credit ratings. Given that Korea''s patents to GDP are the highest level in the world, the analysis of the impact of patents on Korea''s credit rating would be quite meaningful. Our findings may provide managers with policy implications for credit ratings or patent strategies of their firms. However, this dissertation does not reflect the quality of a patent such as the number of citations or the amount of value-added of it. It will be an interesting future study if relevant data are available.