The Likelihood of Credit Rating Downgrade and Labor Investment Efficiency

Abstract

This study examines how the likelihood of credit rating downgrade shapes firms’ labor investment efficiency as part of their internal resource allocation decisions. In particular, I focus on firms positioned at the lower end of a given rating category, where the assigned notch indicates a heightened risk of future downgrades and a potential deterioration in financing conditions. Faced with such pressure, firms are likely to manage their resources more cautiously and to curb inefficient investment. Accordingly, I expect that firms subject to greater downgrade risk adjust their labor investment more efficiently in an effort to maintain stable operations. To test this prediction, I conduct panel regression analyses using manufacturing firms listed on the KOSPI and KOSDAQ markets over the period 2011 – 2022. The empirical results show that firms exposed to higher downgrade risk exhibit significantly greater labor investment efficiency. This suggests that the threat of a rating downgrade induces firms to tighten internal decision-making and reduce inefficiencies in labor investment. Overall, the findings indicate that credit rating dynamics play a meaningful disciplinary role in firms’ real operating decisions, particularly in how they manage labor as a key resource.