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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.

Suggested Citation

  • Kraft, Kornelius & Czarnitzki, Dirk, 2004. "Are Credit Ratings Valuable Information?," ZEW Discussion Papers 04-07, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:1608
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    References listed on IDEAS

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    1. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January.
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    3. 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).
    4. repec:bla:joares:v:22:y:1984:i::p:59-82 is not listed on IDEAS
    5. Kaiser, Ulrich, 2001. "Moving in and out of financial distress: evidence for newly founded service sector firms," ZEW Discussion Papers 01-09, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    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 241-259, September.
    7. 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.
    8. John Ammer & Frank Packer, 2000. "How consistent are credit ratings? a geographic and sectoral analysis of default risk," International Finance Discussion Papers 668, Board of Governors of the Federal Reserve System (U.S.).
    9. Ilia D. Dichev, 1998. "Is the Risk of Bankruptcy a Systematic Risk?," Journal of Finance, American Finance Association, vol. 53(3), pages 1131-1147, June.
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    Citations

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    Cited by:

    1. 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.
    2. Dirk Czarnitzki & Hanna Hottenrott, 2011. "R&D investment and financing constraints of small and medium-sized firms," Small Business Economics, Springer, vol. 36(1), pages 65-83, January.
    3. Barbara Luppi & Massimiliano Marzo & Antonello Scorcu, 2008. "Credit risk and Basel II: are nonprofit firms financially different?," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 4(3), pages 199-203.
    4. repec:eee:respol:v:47:y:2018:i:2:p:527-541 is not listed on IDEAS
    5. repec:rim:rimwps:30-07 is not listed on IDEAS
    6. Katrin Hussinger, 2008. "R&D and subsidies at the firm level: an application of parametric and semiparametric two-step selection models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(6), pages 729-747.
    7. Löschel, Andreas & Lutz, Benjamin Johannes & Massier, Philipp, 2017. "Credit constraints, energy management practices, and investments in energy saving technologies: German manufacturing in close-up," CAWM Discussion Papers 98, University of Münster, Center of Applied Economic Research Münster (CAWM).
    8. 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.
    9. 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.
    10. 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.

    More about this item

    Keywords

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

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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