Abstract

This study analyzes the effects of tax information (net operating losses (“NOL” hereafter) and book tax differences (“BTD” hereafter)) on corporate credit assessment measured with credit rating (“CR” hereafter), credit score (“CS” hereafter) and financial score (“FS” hereafter). This study first shows through the result of factor analysis that each credit assessment variable (CR, CS and FS) has its own explanation power and, as a result, can be deemed as separate concept. Next, the regression results of this study show that NOL has insignificant effect on CR while BTD has a negative effect on CR, which implies that (i) NOL’s measurement effect and information effect on CR are mingled together and (ii) BTD’s reversal effect on CR, defined as the decrease in future earnings due to current earnings management, is much bigger than BTD’s tax savings effect on CR. Furthermore, it is shown that NOL has insignificant effect on CS while BTD has a positive effect on CS, which implies that (i) despite CS’s more emphasis on financial information, NOL’s negative information content for CS is not as enough as expected and (ii) BTD’s tax savings effect on CS is much bigger than BTD’s reversal effect on CS. Finally, it is shown that NOL has a negative effect on FS while BTD has a positive effect on FS, which, though it appears inconsistent with the regression results with CS, implies that NOL’s negative information content for FS is bigger than that for CS.

Keywords

• Credit Rating
• Credit Score
• Financial Score
• Net Operating Losses
• Book Tax Differences

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