Have ratings become more accurate?
Zvika Afik and
Koresh Galil
Journal of Banking & Finance, 2025, vol. 170, issue C
Abstract:
Prior studies indicate that rating agencies have adopted more stringent rating criteria over time. In this paper, we hypothesize that improvements in rating accuracy can explain some of these observed patterns. We present empirical evidence supporting this hypothesis, demonstrating that enhancements in rating methodologies have resulted in better default prediction. Our analysis also reveals that, over time, ratings have become more closely aligned with accounting fundamentals and a market-based measure of default risk (distance-to-default). These findings provide a fresh perspective on the factors influencing changes in credit rating standards and emphasize the significance of methodological advancements in credit risk assessment. This research introduces the novel argument that enhancing rating accuracy is an economic rationale for long-term rating trends. The findings underscore the continued importance of credit ratings despite criticisms, suggesting that ratings remain a valuable tool for investors.
Keywords: Credit risk; Credit rating; Default prediction (search for similar items in EconPapers)
JEL-codes: G13 G17 G33 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:170:y:2025:i:c:s0378426624002516
DOI: 10.1016/j.jbankfin.2024.107337
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