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Title: The Rating Decision and the Determinants of Credit Ratings : An Empirical Investigation of UK Companies
Author: Gonis, Eleimon
ISNI:       0000 0004 2695 7839
Awarding Body: University of the West of England, Bristol
Current Institution: University of the West of England, Bristol
Date of Award: 2010
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Credit ratings aim to inform financial markets about company creditworthiness. They are used extensively by a variety of market participants to inform their portfolio selection processes as well as regulators to monitor and control the capital markets. However, the proprietary models employed by rating agencies have attracted criticism in times of economic uncertainty for their contribution to the propagation of financial crises. They have also become the focal point of academic research in respect of investigating the determinants of the rating process and the effects of ratings on market dynamics. This study examines the determinants of the decision of UK companies to obtain a credit rating by proposing a conceptual framework that draws upon the information asymmetry, signalling and default literature. In addition, it extends the extant literature on the determinants of UK firm credit ratings by investigating the individual as well as joint effect of non-financial variables on corporate ratings. It also tracks the development of credit ratings over time and identifies whether UK firm credit quality has been deteriorating and/or rating agencies have increased their rating standards. The study reveals that rated and non-rated companies have significantly different financial profiles. Furthermore, the empirical model emanating from the conceptual framework for modelling the decision to obtain a credit rating includes a combination of financial and non-financial firm attributes, namely size, financial leverage, financial flexibility, use of debt, bond issuance, default risk, institutional ownership and engagement with R&D activity. In addition, the model yields satisfactory results, classifying 9 out of 10 cases correctly. The study also reveals that the inclusion of non-financial variables adds to the explanatory power of the rating determinants models. Moreover, the results of the two stage sample selection models indicate that self-selection is not an issue among UK non-financial companies. Thus, this study concludes that better firms might share unique characteristics in contrast to their non-rated counterparts; nevertheless, these attributes do not result in poor-quality firms refraining from requesting to be rated. Finally, the results show some evidence that UK firm credit quality has deteriorated over time and that credit rating agencies have applied stricter standards in the rating process.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available