The Quality of Corporate Credit Rating: An Empirical Investigation
78 Pages Posted: 14 Jun 2003
Date Written: October 2003
The quality of external credit ratings has scarcely been examined. The common thesis is that the rating firms' need for reputation and competitiveness in the rating industry force rating agencies to provide ratings that are efficient with respect to the information available at the time of rating. However, there are several reasons for doubting this thesis. In this paper I use survival analysis to test the quality of S&P corporate credit ratings in the years 1983-1993. Using sample data from 2631 bonds, of which 238 defaulted by 2000, I provide evidence that ratings could be improved by using publicly available information and that some categorizations of ratings were not informative. The results also suggest that ratings as outlined in S&P methodology were not fully adjusted to business cycles. The methodological contribution of this paper is the introduction of proportional hazard models as the appropriate framework for parameterizing the inherent ratings information.
Keywords: Credit Risk, Credit Rating, Corporate Bonds, Survival Analysis
JEL Classification: G10, G12, G14, G20
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