Quick Summary
- Credit rating agencies base risk from company innovation on sound economic reasons
- Companies with higher quality accounting pose less risk for credit rating agencies
- Corporations may want to urge agencies to adjust ratings more quickly
New research busts the myth that credit rating agencies are lazy and biased when it comes to accounting for innovation.
Professor Paul Griffin of the Graduate School of Management at the University of California, Davis, and his co-authors recently examined U.S. credit rating data. With a shift in the U.S. toward a knowledge-based economy, creditworthiness increasingly depends on the success of a firm鈥檚 research and development investments and other intangible assets.
鈥淭he name of the game in economic growth is innovation,鈥 Griffin said. 鈥淎merica is now second in the race versus China in terms of patents and patent recognition.鈥
Credit ratings help investors determine who will meet their obligations. The ratings come in the form of letter grades and are meant to represent objective and independent analyses of a firm鈥檚 ability to pay its debts.
Griffin teamed up with Hyun Hong from UC Riverside and Ji Woo Ryou from the University of Texas Rio Grande Valley. They compared new data on patent filings and citations to analyses of Standard & Poor鈥檚, Moody鈥檚 and Fitch IBCA ratings services. They found sound economic reasons to explain delays by rating agencies in accounting for company innovation.
Specifically, they show that corporate innovation efficiency 鈥 measured by the number of patents divided by research and development expenditures 鈥 improved credit ratings, though gradually. Their findings were .
鈥淚t wasn鈥檛 a question of ignorance or laziness,鈥 Griffin said of the credit rating agencies. 鈥淲e found that we could explain these trends in ways that represent rational ways to think about it.鈥
The findings also refute the prevailing view that rating agencies focus more on earnings and sales than innovation and lack clear recognition of how innovation can affect creditworthiness.
鈥淲hile innovation has sometimes been side-lined in analyses by credit rating agencies,鈥 Griffin said, 鈥渢he ratings can have global impacts on economic growth.鈥
The study identified three reasons that credit agencies are slow to pick up on innovation:
- Poorly performing companies pose risks 鈥 If a firm already has a low credit rating, the agencies are more concerned with that downside risk than the upside risk in the payoff from innovation. 鈥淐redit rating agencies need to focus on what鈥檚 important to the creditors, and that is the possibility that they could lose all their money,鈥 Griffin said.
- Not all patents lead to payoffs 鈥 The researchers found that firms with patents that led to higher payoffs saw improved ratings. 鈥淩ating agencies are not going to take a wild guess,鈥 Griffin said. 鈥淭hey鈥檙e going to wait until information confirms that the patent actually is a beneficial patent. They also have a reputation to protect.鈥
- Accounting quality matters 鈥 The response of the agency also reflects the quality of financial information the firm is providing, as well as its sales. 鈥淚f a firm鈥檚 reports are opaque or nontransparent, it is harder to figure out what the payoffs to the patents are,鈥 Griffin said.
Following the global financial crisis, credit rating agencies were accused of colluding with big banks. When it comes to innovation information, however, the study shows there is no such evidence.
鈥淲e can rest assured that the credit views of firms with innovations are being properly reflected in credit pricing,鈥 he said. 鈥淭hey鈥檙e not being hurt because this technical information is being misunderstood.鈥
Given this finding of a lag in responding to innovation, Griffin pointed out that corporations may want to call on agencies to act more quickly to improve their ratings.
Media Resources
Paul Griffin, Graduate School of Management, cell 530-219-1176, pagriffin@ucdavis.edu
Tim Akin, Graduate School of Management, 530-752-7362, tmakin@ucdavis.edu
Julia Ann Easley, 澳门六合彩开奖结果走势图 News and Media Relations, 530-752-8248, jaeasley@ucdavis.edu