What Factors Drive Corporate Credit Ratings? Evidence from German SMEs and Large Corporates

58 Pages Posted: 10 Feb 2014 Last revised: 5 Mar 2014

See all articles by Wolfgang Drobetz

Wolfgang Drobetz

University of Hamburg

Sascha Heller

University of Hamburg

Date Written: March 05, 2014

Abstract

Ratings agencies have currently been strongly criticised for what role they have played before and during the 2008 global financial crisis. One implication was that rating agencies operating in the European Union must now be registered by the European Securities and Markets Authority (ESMA). They are required to disclose the methodologies used for rating decisions. Rating agencies, however, generally point out that they apply an analyst-driven process where the resulting credit rating is mainly based on the opinion of their rating analysts and not exclusively based on mathematically derived models. But then, regulatory requirements might not be completely fulfilled and some transparency could still be lacking. This study aims to provide some insights into how credit ratings might be derived with respect to financial risk and business risk factors. Our results indicate that qualitative information is significant in explaining credit ratings, and that the pure financial information is – at least to some extent – predominated by soft facts. This must be taken into account by supervising authorities in order to define appropriate reporting requirements.

Keywords: corporate rating, creditworthiness, rating agencies, determinants, financial risk, business risk

JEL Classification: G24, G32

Suggested Citation

Drobetz, Wolfgang and Heller, Sascha, What Factors Drive Corporate Credit Ratings? Evidence from German SMEs and Large Corporates (March 05, 2014). Available at SSRN: https://ssrn.com/abstract=2392377 or http://dx.doi.org/10.2139/ssrn.2392377

Wolfgang Drobetz (Contact Author)

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Sascha Heller

University of Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

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