Credit Rating under Ambiguity

68 Pages Posted: 26 Sep 2023

See all articles by Christian Hilpert

Christian Hilpert

Sun Yat-sen University (SYSU) - Lingnan College

Stefan Hirth

Aarhus University; Danish Finance Institute

Jan Pape

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Alexander Szimayer

University of Hamburg - Faculty of Economics and Business Administration

Date Written: September 7, 2023

Abstract

We consider the impact of ambiguity on credit rating with feedback effects. A firm signals its quality by surviving phases of apparent distress. A rating agency, whose analysts hold multiple priors about the firm’s true asset value, for example, due to the difficulties in the valuation of intangible assets, aims for unbiased ratings. Contrasting classical min-max results, the rating agency selects a dynamically adjusted weighted average of multiple beliefs that overweight uninformative beliefs. The ambiguity impact on ratings hinges on whether the disagreement between the analysts has a common direction: When analysts jointly perceive the firm’s value of intangibles as overstated, feedback effects make the firm delay default to benefit from the rating agency’s learning.

Keywords: Learning Dynamics, Strategic Interaction, Quantitative Debt Models, Ambiguity

JEL Classification: D83, G24, G33

Suggested Citation

Hilpert, Christian and Hirth, Stefan and Pape, Jan and Szimayer, Alexander, Credit Rating under Ambiguity (September 7, 2023). Available at SSRN: https://ssrn.com/abstract=4564357 or http://dx.doi.org/10.2139/ssrn.4564357

Christian Hilpert (Contact Author)

Sun Yat-sen University (SYSU) - Lingnan College ( email )

GuangZhou, GuangDong
China

Stefan Hirth

Aarhus University ( email )

Fuglesangs Allé 4
Aarhus V, 8210
Denmark

HOME PAGE: http://hirth.dk

Danish Finance Institute ( email )

Jan Pape

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

Alexander Szimayer

University of Hamburg - Faculty of Economics and Business Administration ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

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