Financial Determinants of Bond Ratings in Emerging Markets: Evidence from Indonesian Industrial Firms

Abstract

This study investigates the determinants of bond ratings in Indonesian industrial companies during the period 2019–2022, a time marked by the covid-19 pandemic and subsequent economic turbulence. Bond ratings serve as a critical measure of creditworthiness for investors and issuing firms, yet empirical evidence on their financial determinants in the industrial sector remains limited. Guided by signaling theory, this study examines how profitability, leverage, liquidity, and firm size affect bond ratings. The research employs a quantitative associative design with a saturated sampling method, covering all 28 industrial firms listed on the Indonesia stock exchange (IDX) and rated by Pefindo, resulting in 112 firm-year observations. Secondary data were obtained from audited financial statements and rating reports. Data analysis was conducted using multiple linear regression, supported by classical assumption tests to ensure model validity. The findings reveal that profitability has a significant positive effect on bond ratings, indicating that higher earnings strengthen investor and rating agency confidence in firms’ repayment ability. Leverage shows a significant negative effect, suggesting that excessive debt reduces financial flexibility and increases default risk. Interestingly, liquidity also exhibits a significant negative effect, contrary to conventional expectations, which may reflect the low quality of current assets during inflationary pressures. Firm size, however, is not found to significantly influence bond ratings. Overall, the model explains only 9.2% of the variation in bond ratings, suggesting that external factors such as macroeconomic shocks and governance play a larger role. These results provide practical insights for companies, investors, and rating agencies in strengthening credit assessment practices in emerging markets.