Rating Agencies Add Value in Credit Risk Assessment?

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.