A STUDY ON THE DETERMINANTS OF BOND YIELD AND BOND RATING CHANGES IN MALAYSIA

Abstract

The first objective of this study is to investigate whether the measures of risks can be a substitute to bond ratings. The second objective is to examine the impact of measures of risks on bonds with rating changes. The sample of bond includes issuances of both conventional and Islamic corporate bond from the year 2005 to 2013, obtained from Datastream and Bondstream. OLS regression is used to investigate the first objective. While, binomial logistic regression is used to examine the second objective. The final sample includes a total of 175 issuances from 37 corporate firms, where four firms experienced upgrades and five experienced downgrades that constituted of 52 issuances. The findings highlight that the measures of risks are adequate in determining bond yield, hence being a liable substitute for bond ratings. Furthermore, the estimated model show that bond rating changes can be explained relatively well by only few measures of risks. Firm’s credit worthiness is a significant determinant for an upgrade in rating. While bond’s coupon rate is a significant determinant for a downgrade. Overall, this study adds value to bond investors as they can focus more on the measures of firm’s default risk such as, firm’s profitability, coverage and leverage as a strategic implication. This study is able to assist rating agencies and investors in evaluating newly issued or unrated bonds. Firms can focus on certain areas of their financial positions in order to achieve a good credit rating by using the developed model.