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

37 Pages Posted: 3 Jul 2012

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

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Date Written: April 12, 2012

Abstract

​We aim to assess how accurately accounting and stock market indicators predict rating changes for Asian banks. We conduct a stepwise process to determine the optimal set of early indicators by tracing upgrades and downgrades from rating agencies, as well as other relevant factors. Our results indicate that both accounting and market indicators are useful leading indicators but are more effective in predicting upgrades than downgrades, especially for large banks. Moreover, early indicators are only significant in predicting rating changes for banks that are more focused on traditional banking activities such as deposit and loan 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? (April 12, 2012). Bank of Finland Research Discussion Paper No. 15/2012, Available at SSRN: https://ssrn.com/abstract=2098964 or http://dx.doi.org/10.2139/ssrn.2098964

Isabelle Distinguin

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Iftekhar Hasan (Contact Author)

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

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

5 rue Felix Eboue
Limoges, 87000
France

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