Does Corporate Litigation Risk Affect Disagreement Among Credit Rating Agencies?

This study investigates the impact of corporate litigation risk on credit rating disagreement among credit rating agencies (CRAs). Litigation risk increases uncertainty regarding a firm’s future financial stability and reputation, potentially leading to divergent evaluations by CRAs. This issue has become increasingly relevant amid heightened legal risks driven by pro-patent policies during the Trump administration and a rise in labor disputes in South Korea. Using data on publicly listed firms in South Korea from 2011 to 2023, this study employs logit and ordered logit regression models to examine the relationship between litigation risk and split credit ratings. Litigation risk is measured by a firm’s involvement as a defendant, the number of lawsuits filed, and the monetary value of claims. Credit rating disagreement is derived from ratings issued by Korea Ratings, NICE Investors Service, and Korea Investors Service. Empirical findings reveal that firms with higher litigation risk are more likely to experience disagreement among CRAs. In particular, a greater number of lawsuits and higher claim amounts are associated with larger rating gaps. These results suggest that litigation risk intensifies information asymmetry, making consensus among CRAs more difficult. This study contributes to the literature on credit rating determinants by incorporating legal risk as a previously underexplored but significant driver of rating disagreement. While prior research has mainly emphasized financial metrics and corporate governance, this study highlights the importance of legal events in shaping credit assessments. The findings offer practical implications for investors, who should incorporate litigation risk into investment decisions, and for rating agencies, which should enhance their methodologies to systematically account for litigation-related uncertainty. Ultimately, this research broadens the understanding of how non-financial risks influence credit market dynamics and assessment reliability.