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Are Credit Ratings Valuable Information?

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  • Kraft, Kornelius
  • Czarnitzki, Dirk

Abstract

Credit ratings are commonly used by lenders to assess the default risk, because every credit is connected with a possible loss. If the probability of a default is above a certain threshold, a credit will not be provided. The purpose of this paper is to test whether credit ratings contribute valuable information on the creditworthiness of firms. Employing a large sample of Western German manufacturing firms, we investigate loan defaults. First, we estimate Probit models with publicly available information. Subsequently, we additionally use a credit rating and show that it contributes significantly to the regression fit. However, the publicly available information has an independent effect aside of the ratings. Simple calculations demonstrate that the interest rate has to increase significantly to compensate for a possible loss in case of default, if a firm has a weak rating. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 04-07.

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Date of creation: 2004
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Handle: RePEc:zbw:zewdip:1608

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Keywords: Credit Rating; Insolvency; Loan Default; Discrete Regression Models;

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References

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  1. Ilia D. Dichev, 1998. "Is the Risk of Bankruptcy a Systematic Risk?," Journal of Finance, American Finance Association, vol. 53(3), pages 1131-1147, 06.
  2. Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1011-1028, May.
  3. William B. English & William R. Nelson, 1998. "Bank risk rating of business loans," Finance and Economics Discussion Series 1998-51, Board of Governors of the Federal Reserve System (U.S.).
  4. Ewert, Ralf & Szczesny, Andrea, 2001. "Countdown for the New Basle Capital Accord: Are German banks ready for the internal ratings-based approach?," CFS Working Paper Series 2001/05, Center for Financial Studies (CFS).
  5. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
  6. Veall, Michael R & Zimmermann, Klaus F, 1996. " Pseudo-R-[superscript 2] Measures for Some Common Limited Dependent Variable Models," Journal of Economic Surveys, Wiley Blackwell, vol. 10(3), pages 241-59, September.
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Citations

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Cited by:
  1. Chang, C. & Liao, G. & Yu, X. & Ni, Z., 2009. "Information from Relationship Lending: Evidence from China," Discussion Paper 2009-39 S, Tilburg University, Center for Economic Research.
  2. Katrin Hussinger, 2004. "R&D and Subsidies at the Firm Level: An Application of Parametric and Semi-Parametric Two-Step Selection Models," Public Economics 0403005, EconWPA.
  3. Dirk Czarnitzki & Julie Delanote, 2013. "Young Innovative Companies: the new high-growth firms?," Industrial and Corporate Change, Oxford University Press, vol. 22(5), pages 1315-1340, October.
  4. Czarnitzki, Dirk & Binz, Hanna L., 2008. "R&D Investment and Financing Constraints of Small and Medium-Sized Firm," ZEW Discussion Papers 08-047, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Blumenstock, Hendrik & von Grone, Udo & Mehlhorn, Marc & Merkl, Johannes & Pietz, Marcus, 2012. "Einflussfaktoren von CDS-Spreads als Maß für das aktuelle Bonitätsrisiko: Liefert das Rating eine Erklärung?," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2012-03, University of Bayreuth, Chair of Finance and Banking.
  6. Fantazzini, Dean & DeGiuli, Maria Elena & Figini, Silvia & Giudici, Paolo, 2009. "Enhanced credit default models for heterogeneous SME segments," Journal of Financial Transformation, Capco Institute, vol. 25, pages 31-39.
  7. B. Luppi & M. Marzo & E. Scorcu, 2007. "Credit risk and Basel II: Are non-profit firms financially different?," Working Papers 601, Dipartimento Scienze Economiche, Universita' di Bologna.
  8. Hussinger, Katrin, 2005. "Did Concentration on Core Competencies Drive Merger and Acquisition Activities in the 1990s? Empirical Evidence for Germany," ZEW Discussion Papers 05-41, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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