Last modified: 2017-06-22
Abstract
This paper investigates how the “convertibility” of convertible bonds (CBs) affects the credit ratings that Rating and Investment Information Incorporated (R&I) develops and uses in its credit rating process empirically.
Under Japanese accounting standards, it is permitted to record as full liabilities without identifying the conversion right of convertible bonds. If there is a high likelihood of conversion of CBs, such accounting may not adequately indicate the economic realities of securities, and users of financial statements may modify the financial figures to interpret them. This paper focuses on credit risk assessment conducted by rating agencies rather than observing the valuation of the securities markets to which major interests have been directed so far.
As a result of the verification, it was shown that the fact of stock conversion and its high probability are factors that improve credit risk assessment even if other factors are controlled. The fact that the accounting figures are corrected and interpreted by users of financial statements implies that current account treatment of CBs may not necessarily fully demonstrate information that contributes to decision making efficiently.