What Factors Drive Corporate Credit Ratings? Evidence from German SMEs and Large Corporates

Abstract

Ratings agencies have currently been strongly criticised for what role they have played before and during the 2008 global financial crisis. One implication was that rating agencies operating in the European Union must now be registered by the European Securities and Markets Authority (ESMA). They are required to disclose the methodologies used for rating decisions. Rating agencies, however, generally point out that they apply an analyst-driven process where the resulting credit rating is mainly based on the opinion of their rating analysts and not exclusively based on mathematically derived models. But then, regulatory requirements might not be completely fulfilled and some transparency could still be lacking. This study aims to provide some insights into how credit ratings might be derived with respect to financial risk and business risk factors. Our results indicate that qualitative information is significant in explaining credit ratings, and that the pure financial information is – at least to some extent – predominated by soft facts. This must be taken into account by supervising authorities in order to define appropriate reporting requirements.