Improving performance of corporate rating prediction models by reducing financial ratio heterogeneity

Martin Niemann, Jan Hendrik Schmidt and Max Neukirchen

Journal of Banking & Finance, 2008, vol. 32, issue 3, 434-446

Abstract: We introduce a new approach to improve the performance of rating prediction models for multinational corporations. In this segment, the low number of defaults poses a challenge, as it prevents rating models to be constructed for individual industry sectors or regions. We show that reducing group-level heterogeneity in financial ratios results in a rating prediction model with better performance than both unadjusted models and models adjusted by including industry dummies or other simpler procedures. Our approach fills a gap in cases where a limited dataset does not permit the construction of separate models for individual industries or regions.

Date: 2008
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:32:y:2008:i:3:p:434-446

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