Misconceptions About Credit Ratings: An Empirical Analysis of Credit Ratings Across Market Sectors and Agencies

33 Pages Posted: 6 Dec 2013

See all articles by Kerstin Lopatta

Kerstin Lopatta

University of Oldenburg - Accounting and Corporate Governance

Magdalena Tchikov

University of Oldenburg

Finn Marten Körner

ZenTra - Center for Transnational Studies; Uniper SE

Date Written: November 29, 2013

Abstract

Rating agencies strive to assign reliable, objective and comparable credit ratings as an indicator on one consistent scale. We test empirically how rating agencies meet their promise of providing objective and comparable assessments of credit risk of an issuer and thus creditworthiness. Logistic regressions of ratings across agencies and market sectors point to highly significant differences of ratings for issuers in the 11 market sectors in our sample. Based on inter-sectoral comparisons, we detect a systematically positive rating bias for financial issuers, while issuers operating in the cyclical consumer goods sector face relatively disadvantageous credit ratings. Our results indicate that the current assessment models and measurement standards do not only contain issuers’ credit risk but to a considerable extent also an assessment of industry and operating risk. Credit ratings should therefore not be equated with the likelihood of default as is often done in empirical applications. Stakeholders and especially investors – as well as researchers – should be aware of this misconception and not refer to ratings as pure measures of default risk.

Keywords: credit ratings, credit risk, default probabilities, comparability

JEL Classification: F65, G14, G15, G24

Suggested Citation

Lopatta, Kerstin and Tchikov, Magdalena and Körner, Finn Marten, Misconceptions About Credit Ratings: An Empirical Analysis of Credit Ratings Across Market Sectors and Agencies (November 29, 2013). ZenTra Working Paper in Transnational Studies No. 22 / 2013. Available at SSRN: https://ssrn.com/abstract=2363883

Kerstin Lopatta (Contact Author)

University of Oldenburg - Accounting and Corporate Governance ( email )

Ammerländer Heerstraße 114-118
Oldenburg, DE D-26111
Germany

Magdalena Tchikov

University of Oldenburg ( email )

Ammerländer Heerstraße 114-118
Oldenburg, DE D-26111
Germany

Finn Marten Körner

ZenTra - Center for Transnational Studies ( email )

Carl von Ossietzky University of Oldenburg
Ammerländer Heerstraße 138
Oldenburg, 26129
Germany

HOME PAGE: http://www.zen-tra.de

Uniper SE ( email )

E.ON-Platz 1
Düsseldorf, 40479
Germany

HOME PAGE: http://https://www.uniper.energy/

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