Are the Standards Too Poor? An Empirical Analysis of the Timeliness and Predictability of Credit Rating Changes

43 Pages Posted: 2 Feb 2005

See all articles by Paul Robbe

Paul Robbe

Erasmus University Rotterdam (EUR) - Department of Financial Management

Ronald Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group; TiasNimbas Business School

Date Written: January 31, 2005

Abstract

In this paper we investigate the dynamics of credit rating changes by Standard & Poor's (S&P) for all 583 companies that were included in the S&P 500 index between July 1998 and June 2003. Our analysis shows that KMV Corporation, a 'new' entrant to the credit rating industry that uses a quantitatively oriented, market-based approach to credit risk measurement, provides a significantly timelier insight into companies' credit quality changes than the qualitatively oriented, accounting-based approaches used by S&P. Based on a sample of 690 rating changes reported by S&P during the sample period, we show that 75% of the S&P rating changes are significantly anticipated by KMV more than a year in advance. Furthermore, we test for the predictability of S&P's rating changes. We show that KMV's Expected Default Frequencies possess considerable predictive power to forecast future rating changes by S&P.

Keywords: Credit ratings, predictability, credit rating agencies

JEL Classification: G14, G28

Suggested Citation

Robbe, Paul and Mahieu, Ronald J., Are the Standards Too Poor? An Empirical Analysis of the Timeliness and Predictability of Credit Rating Changes (January 31, 2005). Available at SSRN: https://ssrn.com/abstract=648561 or http://dx.doi.org/10.2139/ssrn.648561

Paul Robbe

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands

Ronald J. Mahieu (Contact Author)

Tilburg University - Center for Economic Research, Econometrics and Finance Group ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2430 (Phone)
+31 13 466 3280 (Fax)

HOME PAGE: http://center.uvt.nl/staff/mahieu/

TiasNimbas Business School ( email )

Warandelaan 2
Tilburg, North-Brabant 5071HS
Netherlands

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