Credit Ratings: Qualitative Versus Quantitative Information
49 Pages Posted: 19 Jun 2017
Date Written: June 15, 2017
While credit rating agencies are of central importance to credit markets, it is still unclear how credit ratings decisions are being made. Are credit rating quantitatively hard-wired? Or, do ratings represent a more holistic approach to the evaluation of creditworthiness? I evaluate the quantitative content of rating decisions made by S&P Global Ratings Inc. and assess its development over time. I find that S&P rating decisions moved from being quantitative to being qualitative and then being highly quantitative again in the last few years. I also find that rating standards became more lenient during the global financial crisis suggesting that it is possible that ratings were artificially held up to avoid even further downgrades.
My results suggest that, in general, S&P rating decisions are highly quantitative and can be predicted with a high degree of accuracy using firm characteristics. In fact, my analysis suggests that credit rating decisions can be replaced by an algorithm that uses just ten financial variables.
Keywords: Credit Rating
JEL Classification: G24, G32
Suggested Citation: Suggested Citation