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The relationship between Credit Ratings and Beta: A quantitative study on the Nordic market (Management Project)

This study aims to investigate the relationship between systematic risk and credit ratings. The systematic risk, frequently measured by beta, is an important consideration for both investors and corporations. Therefore it is interesting to examine if indications about the systematic risk could be gained by looking at credit ratings, especially on the Nordic market, where credit ratings are seemingly growing in importance. Consequently, the following research hypothesis is posed; We intend to establish a relationship between market risk (Beta) and credit ratings for firms in the Nordic countries.

In order to confirm or deny the research hypothesis, theories from peer reviewed databases were collected. These were divided into three sections; background theories, hypotheses about credit ratings and a literature review. The background theories consisted of two classical financial theories, the Capital Asset Pricing Model and the Efficient Market Hypothesis, which are the foundation upon which the research field have progressed. The hypotheses is specifically designed to explain the relationship between credit ratings and either systematic risk or stock price. The literature review contains information about studies which did not contribute to theory building, but produced results interesting in the research area.

The actual sample in the project consisted of the 58 credit rated companies on the Nordic stock market. These companies were rated by Moody’s and/or Standard & Poor’s, the two largest credit rating agencies in the world. As a measure of the systematic risk, betas for each of the companies were calculated. To investigate the relationship between these variables a regression analysis was performed, as well as one sample T-test using the software SPSS.

The result revealed a moderate relationship between beta and credit risk, a relationship which was not statistically significant on the five percent level. Our results suggest that credit ratings contain some information about companies’ systematic risk, a finding that might be useful for market participants.
Source: Umeå University
Authors: Östlund, Andreas | Hyleen, Mikael

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