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Predicting serial credit rating downgrades

Author

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  • Malone, Lance
  • Smales, Lee A.
  • Liu, Zhangxin (Frank)

Abstract

This paper examines the predictability and implications of sequential credit rating downgrades under the through-the-cycle rating methodology. Using 28,847 firm-year observations for North American corporates, we show that firms partway through downgrade sequences exhibit weaker fundamentals than non-downgraded peers with the same rating, implying interim ratings misstate credit risk. Predictive models of future downgrades achieve up to 75 % accuracy, with out-of-sample tests and feature-importance measures confirming robustness. A simple portfolio exercise illustrates economic significance. Our findings extend the literature on rating inertia and highlight the usefulness of credit-quality signals for anticipating rating actions.

Suggested Citation

  • Malone, Lance & Smales, Lee A. & Liu, Zhangxin (Frank), 2026. "Predicting serial credit rating downgrades," Global Finance Journal, Elsevier, vol. 69(C).
  • Handle: RePEc:eee:glofin:v:69:y:2026:i:c:s1044028325001486
    DOI: 10.1016/j.gfj.2025.101221
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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