ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

A Study on the Effect of Stock Misvaluation on Debt Financing Cost

  • Sun Pil Hwang Center for Sustainable Accounting and Finance, Seoul National University

Asian Tax Journal Vol. 22 No. 1 (2021), pp. 185-215

Abstract

The difference between a firm’s market value and its intrinsic value (valuation error) can lead to new agency costs. At this time, the investor of the company in which the valuation error has occurred may recognize such agent costs and request additional returns, but may not be aware of this. This study analyzed the relationship between corporate valuation errors and debt financing costs based on the valuation error measurements of Rhodes－Kropf et al. (2005). As a result of the analysis, it was found that bond investors detect information risk due to valuation errors and request a risk premium. Bond investors seem to pay close attention to corporate analysis because they are directly related to the uncertainty of individual companies’ principal and interest collection. On the other hand, it was found that credit rating agencies gave high credit ratings to overvalued companies and rather low credit ratings to undervalued companies in the KOSDAQ market. This can be seen as empirical evidence to support that domestic companies’ credit ratings are generally being upgraded, and credit ratings are being presented too optimistically (Kim Sung－hwan and Kim Tae－dong 2014). This study is preceded in that it analyzes the effect of corporate valuation errors on debt financing costs based on measures of valuation errors verified by Chi and Gupta (2009) and Hertzel and Li (2010). In addition to the research results of previous studies (Jeon Gyu－an and Park Jong－il 2014), the interpretation of information between credit rating agencies and bond investors, which are intermediaries for capital procurement, is discriminatory and that credit rating agencies’ optimistic credit rating tendencies may occur There is a contribution to presenting empirical evidence.

Keywords

  • Misvaluation
  • Overvaluation
  • Debt Financing Cost
  • Credit Rating
  • Functional Fixation

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Asian Tax Journal

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