Rating the Raters

Abstract

This thesis investigates the role of credit ratings in financial markets and their reliability and consistency in assessing corporate default risk. Credit ratings serve as vital tools for reducing information asymmetry between issuers and investors, influencing investment decisions, corporate financing, and regulatory frameworks. While most previous studies analyze aggregated credit ratings across agencies, this thesis adds to the literature by comparing the performance of Fitch Ratings (Fitch) and S&P Global (S&P) in assessing corporate credit risk. To achieve this, we build upon the work of Machek and Hnilica (2013) and Engelmann, Hayden, and Tasche (2003) to evaluate rating performance, using credit rating adjustments from 2014 to 2023.

The findings reveal that there are disparities between Fitch and S&P. Specifically, there are statistically significant differences in the default probabilities associated with similar ratings issued by the agencies. Furthermore, the results indicate that Fitch more frequently positions companies approaching default in the poorest rating categories, whereas S&P tends to distribute these companies more broadly across the speculative grade. Lastly, in the year leading up to default, our findings reveal that Fitch issues larger downgrades upfront, while S&P applies more gradually larger downgrades as default approaches.