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Are Credit Ratings Valuable Information?

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  • Kraft, Kornelius
  • Czarnitzki, Dirk
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.

Suggested Citation

  • Kraft, Kornelius & Czarnitzki, Dirk, 2004. "Are Credit Ratings Valuable Information?," ZEW Discussion Papers 04-07, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:1608
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    Cited by:

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    5. Löschel, Andreas & Lutz, Benjamin Johannes & Massier, Philipp, 2017. "Credit constraints, energy management practices, and investments in energy saving technologies: German manufacturing in close-up," CAWM Discussion Papers 98, University of Münster, Münster Center for Economic Policy (MEP).
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    7. Thomas Lagner & Dodozu Knyphausen‐Aufseß, 2012. "Rating Agencies as Gatekeepers to the Capital Market: Practical Implications of 40 Years of Research," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 21(3), pages 157-202, August.
    8. Dirk Czarnitzki & Julie Delanote, 2013. "Young Innovative Companies: the new high-growth firms?," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 22(5), pages 1315-1340, October.
    9. Fantazzini, Dean & DeGiuli, Maria Elena & Figini, Silvia & Giudici, Paolo, 2009. "Enhanced credit default models for heterogeneous SME segments," Journal of Financial Transformation, Capco Institute, vol. 25, pages 31-39.
    10. Yujing Gong & Kung-Cheng Ho, 2018. "Does corporate social responsibility matter for corporate stability? Evidence from China," Quality & Quantity: International Journal of Methodology, Springer, vol. 52(5), pages 2291-2319, September.
    11. H. Semih Yildirim & Prem Mathew & Priscilla Neeliah-Chinniah, 2008. "The value of stability ratings to the Canadian income trust market," Applied Financial Economics, Taylor & Francis Journals, vol. 18(18), pages 1465-1474.
    12. Sarah Kösters & Martin Obschonka, 2011. "Public Business Advice in the Founding Process: An Empirical Evaluation of Subjective and Economic Effects," Environment and Planning C, , vol. 29(4), pages 577-604, August.
    13. Jens Horbach & Christian Rammer, 2020. "Circular economy innovations, growth and employment at the firm level: Empirical evidence from Germany," Journal of Industrial Ecology, Yale University, vol. 24(3), pages 615-625, June.
    14. Blumenstock, Hendrik & von Grone, Udo & Mehlhorn, Marc & Merkl, Johannes & Pietz, Marcus, 2012. "Einflussfaktoren von CDS-Spreads als Maß für das aktuelle Bonitätsrisiko: Liefert das Rating eine Erklärung?," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2012-03, University of Bayreuth, Chair of Finance and Banking.
    15. Dirk Czarnitzki & Hanna Hottenrott, 2011. "R&D investment and financing constraints of small and medium-sized firms," Small Business Economics, Springer, vol. 36(1), pages 65-83, January.
    16. Barbara Luppi & Massimiliano Marzo & Antonello E. Scorcu, 2007. "Credit risk and Basel II: Are non-profit firms financially different?," Working Paper series 30_07, Rimini Centre for Economic Analysis.
    17. Ngare, Philip, 2019. "Analysis of the coexistence of conventional and unconventional credit markets in the agribusiness sector in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 37, Kenya Bankers Association (KBA).
    18. Patrick Bielstein & Mario Fischer & Christoph Kaserer, 2018. "The cost of capital effect of M&A transactions: Disentangling coinsurance from the diversification discount," European Financial Management, European Financial Management Association, vol. 24(4), pages 650-679, September.
    19. Yannick Bammens & Paul Hünermund & Petra Andries, 2022. "Pursuing Gains or Avoiding Losses: The Contingent Effect of Transgenerational Intentions on Innovation Investments," Journal of Management Studies, Wiley Blackwell, vol. 59(6), pages 1493-1530, September.
    20. Dirk Czarnitzki & Hanna Hottenrott, 2011. "Financial Constraints: Routine Versus Cutting Edge R&D Investment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(1), pages 121-157, March.
    21. Horbach, Jens & Rammer, Christian, 2019. "Employment and performance effects of circular economy innovations," ZEW Discussion Papers 19-016, ZEW - Leibniz Centre for European Economic Research.
    22. Giebel, Marek & Kraft, Kornelius, 2020. "R&D investment under financing constraints," ZEW Discussion Papers 20-018, ZEW - Leibniz Centre for European Economic Research.
    23. Hussinger, Katrin, 2005. "Did Concentration on Core Competencies Drive Merger and Acquisition Activities in the 1990s? Empirical Evidence for Germany," ZEW Discussion Papers 05-41, ZEW - Leibniz Centre for European Economic Research.
    24. Ruqia Shaikh & Zhiqiang Li & Xiaoli Wang & Muhammad Rizwan Nazir, 2022. "Firm innovation and ultimate control mechanism: Case of emerging market," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 440-456, March.

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    More about this item

    Keywords

    Credit Rating; Insolvency; Loan Default; Discrete Regression Models;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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