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The effects and applicability of financial media reports on corporate default ratings

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  • Lu, Yang-Cheng
  • Wei, Yu-Chen
  • Chang, Tsang-Yao

Abstract

We propose a corporate default rating process for the Taiwan Stock Market which incorporates financial ratios, corporate governance, macroeconomic variables and financial media reports. Multi-measurements of the ‘distress intensity of default-corpus’ (DIDC) using linguistic analysis are constructed, whilst also examining the explanatory power of the DIDC on financial distress events. The DIDC related to the distressed firms rises significantly prior to the distressed event and the volatility of the DIDC for them exhibits more fluctuations than for the non-distressed companies. Besides, we propose a systematic process for the evaluation of default ratings, with the results for all listed stocks in the Taiwan Stock Market showing that the accuracy of the model with the incorporation of the DIDC outperforms other candidate models. Financial institutions and credit rating agencies could effectively adjust firms’ ratings by referring to both the general default rating model and financial media reports. We suggest that this process of quantifying Chinese media reports and evaluating default ratings with social media could be further applied to the Greater China stock market.

Suggested Citation

  • Lu, Yang-Cheng & Wei, Yu-Chen & Chang, Tsang-Yao, 2015. "The effects and applicability of financial media reports on corporate default ratings," International Review of Economics & Finance, Elsevier, vol. 36(C), pages 69-87.
    • Handle: RePEc:eee:reveco:v:36:y:2015:i:c:p:69-87
    DOI: 10.1016/j.iref.2014.11.008
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    3. Faiza Sajjad & Muhammad Zakaria, 2018. "Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure," JRFM, MDPI, vol. 11(2), pages 1-16, May.
    4. Tian, Shaonan & Yu, Yan, 2017. "Financial ratios and bankruptcy predictions: An international evidence," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 510-526.
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    6. Faiza Sajjad & Muhammad Zakaria, 2018. "Credit Rating as a Mechanism for Capital Structure Optimization: Empirical Evidence from Panel Data Analysis," IJFS, MDPI, vol. 6(1), pages 1-14, January.
    7. Guo, Zhaorui & Chan, Kam C. & Huang, Jun, 2018. "Can media coverage restrain executive empire building and pursuit of a quiet life? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 547-563.

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    More about this item

    Keywords

    Financial media reports; Financial ratios; Default rating; Linguistic analysis; Distress intensity of default-corpus;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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