Rating Agencies Add Value in Credit Risk Assessment?

4 Pages Posted: 21 Sep 2011

See all articles by João Paulo Cardoso

João Paulo Cardoso

Catholic University of Brazil (UCB)

Alberto S. Matsumoto

Universidade Católica de Brasília; Government of the Federative Republic of Brazil - Central Bank of Brazil

Jose L. B. Fernandes

Universidade de Brasília

Benjamin M. Tabak

FGV/EPPG

Paulo César Chagas

Catholic University of Brazil (UCB)

Date Written: September 20, 2011

Abstract

Credit rating is an index for classifying credit risk that attributes scores based on investor trust and confidence in the company issuing bonds in the financial market. This article studies rating as signs of default (insolvency) in companies. Fitch Ratings was used due to the transparency of its evaluations in its annual publications on default. The sample included a total of 268 companies that were listed as going into default in the period from 1990 to 2009. This study tested whether the rating has the power to predict bankruptcy. The results confirmed the predictive power of the rating regarding company defaults. We found a significant relation between rating and default probability: the worse the credit quality of a company according to the classification agency’s analysis, the higher its probability of default was.

Keywords: Crediting Rating, Default, Credit Risk

JEL Classification: G33

Suggested Citation

Cardoso, João Paulo and Matsumoto, Alberto S. and Fernandes, Jose Luiz Barros and Tabak, Benjamin M. and Chagas, Paulo César, Rating Agencies Add Value in Credit Risk Assessment? (September 20, 2011). Available at SSRN: https://ssrn.com/abstract=1931297 or http://dx.doi.org/10.2139/ssrn.1931297

João Paulo Cardoso

Catholic University of Brazil (UCB) ( email )

SGAN 916, Modulo B, Asa Norte
Brasília, DF 70790-160
Brazil

Alberto S. Matsumoto

Universidade Católica de Brasília ( email )

SGAN 916, módulo B, Asa Norte
Brasília, Brasília 70790-160
Brazil
556181618192 (Phone)

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Jose Luiz Barros Fernandes (Contact Author)

Universidade de Brasília ( email )

Campus Universitário Darcy Ribeiro
Brasília, Distrito Federal 70910-900
Brazil

Benjamin M. Tabak

FGV/EPPG ( email )

SGAN Av. L2 Norte - Quadra 602 - Módulos A, B e C
Brasília, Rio de Janeiro 70830-051
Brazil

Paulo César Chagas

Catholic University of Brazil (UCB) ( email )

SGAN 916, Modulo B, Asa Norte
Brasília, DF 70790-160
Brazil

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