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Title:Are Credit Ratings Valuable Information? PDF Logo
Authors:Kraft, Kornelius
Czarnitzki, Dirk
Issue Date:2004
Series/Report no.:ZEW Discussion Papers 04-07
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.
Subjects:Credit Rating
Insolvency
Loan Default
Discrete Regression Models
JEL:C25
G33
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des ZEW
ZEW Discussion Papers

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