Earnings Transparency and Credit ratings : Considering Managerial Overconfidence

We use a measure of earnings transparency designed by Barth et al.(2013) to identify the relationship with credit ratings. We also consider managerial overconfidence in the relationship between earnings transparency and credit ratings, as managerial overconfidence affects financial reporting incentives.<br/> This study focuses on December year-end firms(non-financial firms) listed on the KOSPI and KOSDAQ markets from 2002 to 2023. The main empirical findings are summarised as follows. First, we find that firms with higher earnings transparency significantly improve their credit ratings. This suggests that credit rating agencies clearly reflect corporate profit information in their credit risk assessment and provide it to capital market users. Second, we analyse the impact of earnings transparency on credit ratings by considering managers' overconfidence, and find that the positive relationship between earnings transparency and credit ratings is mitigated for firms with overconfident managers. This is likely due to the fact that managerial overconfidence hinders rational decision-making in business activities, which negatively affects corporate performance and financial policies, and thus reduces the transparency of earnings information as a result of opportunistic behavior of managers.