Predicting Rating Changes for Banks: How Accurate Are Accounting and Stock Market Indicators?

34 Pages Posted: 27 Oct 2008 Last revised: 23 Sep 2009

See all articles by Isabelle Distinguin

Isabelle Distinguin

Université de Limoges, LAPE

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Multiple version iconThere are 2 versions of this paper

Date Written: September 5, 2009

Abstract

We aim to assess the accuracy of accounting and stock market indicators to predict rating changes of banks. We conduct a stepwise process to determine the optimal set of early indicators by tracing upgrades and downgrades by rating agencies as well as other relevant factors. Our results indicate that both accounting and market indicators are useful leading indicators but more effective in predicting upgrades than downgrades, especially for large banks. For small banks, only market indicators contribute to the early detection of downgrades. Moreover, early indicators are only significant in predicting rating changes for banks, more focused on traditional banking activities e.g., deposits and loans activities. Finally, a higher reliance of banks on subordinated debt is associated with better accuracy of early indicators.

Keywords: Bank Failure, Bank Risk, Ratings, Emerging Market

JEL Classification: G21, G28

Suggested Citation

Distinguin, Isabelle and Hasan, Iftekhar and Tarazi, Amine, Predicting Rating Changes for Banks: How Accurate Are Accounting and Stock Market Indicators? (September 5, 2009). Available at SSRN: https://ssrn.com/abstract=1289013 or http://dx.doi.org/10.2139/ssrn.1289013

Isabelle Distinguin

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Amine Tarazi (Contact Author)

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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