Are Credit Ratings Valuable Information?

Posted: 18 Apr 2006

See all articles by Dirk Czarnitzki

Dirk Czarnitzki

Centre for European Economic Research (ZEW); Catholic University of Leuven (KUL)

Kornelius Kraft

University of Dortmund - Department of Economics; IZA Institute of Labor Economics

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, Basle II

JEL Classification: G33

Suggested Citation

Czarnitzki, Dirk and Kraft, Kornelius, Are Credit Ratings Valuable Information?. Applied Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=895971

Dirk Czarnitzki (Contact Author)

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
Mannheim, 68034
Germany

Catholic University of Leuven (KUL) ( email )

Faculty of Economics and Business
Naamsestraat 69
Leuven, 3000
Belgium
+32 16 326906 (Phone)
+32 16 325799 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/msi/faculty_members.htm

Kornelius Kraft

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany
+49 231 755-3152 (Phone)
+49 231 755-3155 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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