Are Credit Ratings Valuable Information?

Kornelius Kraft and Dirk Czarnitzki

No 04-07, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

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.

Keywords: Credit Rating; Insolvency; Loan Default; Discrete Regression Models (search for similar items in EconPapers)
JEL-codes: C25 G33 (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Are credit ratings valuable information? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:1608

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