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Misconceptions about Credit Ratings - An Empirical Analysis of Credit Ratings across Market Sectors and Agencies

Kerstin Lopatta (), Magdalena Tchikov and Finn Körner
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Kerstin Lopatta: University of Oldenburg - Accounting and Corporate Governance & ZenTra
Magdalena Tchikov: University of Oldenburg - Accounting and Corporate Governance & ZenTra

No 22 / 2013, ZenTra Working Papers in Transnational Studies from ZenTra - Center for Transnational Studies

Abstract: Rating agencies strive to assign reliable, objective and comparable credit ratings as an indicator on one consistent scale. We test empirically how rating agencies meet their promise of providing objective and comparable assessments of credit risk of an issuer and thus creditworthiness. Logistic regressions of ratings across agencies and market sectors point to highly significant differences of ratings for issuers in the 11 market sectors in our sample. Based on inter-sectoral comparisons, we detect a systematically positive rating bias for financial issuers, while issuers operating in the cyclical consumer goods sector face relatively disadvantageous credit ratings. Our results indicate that the current assessment models and measurement standards do not only contain issuers’ credit risk but to a considerable extent also an assessment of industry and operating risk. Credit ratings should therefore not be equated with the likelihood of default as is often done in empirical applications. Stakeholders and especially investors – as well as researchers – should be aware of this misconception and not refer to ratings as pure measures of default risk.

Keywords: credit ratings; credit risk; default probabilities; comparability (search for similar items in EconPapers)
JEL-codes: F65 G14 G15 G24 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-11, Revised 2013-11
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2363883 First version, 2013 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:zen:wpaper:22

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