Evolution of corporate credit rating standards from 2002 to 2016

Abstract

Alp (2013) studies how corporate credit ratings’ standards change from 1985 to 2007. The author analyzes a structural break in criteria employed by credit rating agencies (CRAs)around the 2002 financial scandals. I draw a pararell to the Great Recession. In 2008, CRAstake the fall as some financial instruments are not subject to a proper credit assessment. I analyze whether corporate credit ratings are affected after the most recent crises: the DotCom Bubble and the 2008 Financial Crisis. I regress corporate credit ratings on firm fundamentals and year indicators to evaluate how they change from 2002 to 2016. I observe a trend of stringent standards for the entire sample, when compared to 2002. During the Great Recession, corporations are assigned credit ratings that are 0.75 notches lower than in 2002, suggesting an average one­notch downgrade, controlling for firm’s characteristics. I find that, overall, CRAs become less strict after 2009. It should be noted that, in 2016, the standards employed are still less lenient than in 2002, indicating a conservative approach. I split the sample into investment­ and speculative­ grade observations. Standards for investment­grade ratings remain stringent even after the Great Recession, in comparison to 2002, although to a lesser degree. Following the DotCom Bubble, speculative­grade firms experience a steep decline in ratings. After 2009, these companies quickly rebound and are subject to looser standards. Overall, the years of the Great Recession are marked by lower credit ratings, which is confirmed by structural break tests.

Date of Award	3 May 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Mário Meira (Supervisor)