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The Commission pursued several approaches, both formal and informal, to conduct a thorough and meaningful study of credit rating agencies. These efforts included informal discussions with credit rating agencies and market participants, formal examinations of credit rating agencies, and public hearings, where market participants were given the opportunity to offer their views on credit rating agencies and their role in the capital markets. Part II of this Report contains a background discussion of credit rating agencies, and how credit ratings have become incorporated into the current regulatory framework. Part III describes in. | Credit ratings and credit risk Jens Hilscher Mungo Wilsony hilscher@brandeis. edu mungo.wilson@sbs. ox. ac.uk This version January 2012 International Business School Brandeis University 415 South Street Waltham MA 02453 USA. Phone 1-781-736-2261. Sai d Business School Oxford University Park End Street Oxford OX1 1HP UK. Phone 44-1865288914. Wilson acknowledges the help of a Hong Kong RGC grant project no. HKUST6478 06H . We would like to thank Robert Jarrow and Don van Deventer of Kamakura Risk Information Services KRIS for providing us with data on corporate bankruptcies and failures and Effi Benmelech Max Bruche John Campbell Steve Cecchetti Robert Jarrow Blake LeBaron Pegaret Pichler Josh Pollet Tarun Ramadorai David Scharfstein Andrei Shleifer Monica Singhal Jeremy Stein Jan Szi-lagyi Adrien Verdelhan David Webb Robert Whitelaw Moto Yogo and seminar participants at Royal Holloway University of Zurich LSE Humboldt Universitat zu Berlin CEMFI Brandeis University the 2009 Venice C.R.E.D.I.T. conference the Oxford-Man Institute for Quantitative Finance the Federal Reserve Bank of Boston Leicester University the 20th FDIC Derivatives Securities and Risk Management conference the 3rd annual Boston Area Finance Symposium and the 8th GEA conference ESMT Berlin for helpful comments and discussions and Ly Tran for research assistance. Both authors were on leave at the LSE when the first version of this paper was written and would like to thank LSE for its hospitality. 1 Abstract This paper investigates the information in corporate credit ratings. We examine the extent to which firms credit ratings measure raw probability of default as opposed to systematic risk of default a firm s tendency to default in bad times. We find that credit ratings are dominated as predictors of corporate failure by a simple model based on publicly available financial information failure score indicating that ratings are poor measures of raw default probability. However ratings are strongly .
