Rating or no rating: That is the question: An empirical examination of UK companies

Gonis, Eleimon; Tucker, Jon; Paul, Salima

Abstract

The aim of this paper is to examine the main determinants of the rating likelihood of UK companies. We use a binary probit specification to model the main drivers of a firm’s propensity to be rated. Using a sample of 245 non-financial UK companies over the period 1995 to 2006 representing up to 2,872 firm years, the study establishes important differences in the financial profiles of rated and non-rated firms. The results of the rating likelihood models indicate that the decision to obtain a rating is driven by a company’s financial risk, solvency, default risk, public debt issuance, R&D, and institutional ownership, thus identifying a wider range of determinants and extending the current literature. The study also finds that the rating decision can be modelled by means of a contemporaneous or predictive specification without any loss of efficiency or classification accuracy. This offers support to the argument that the rating process is fundamentally forward-looking.

• Journal Article Type: Article
• Publication Date: Feb 1, 2012
• Publicly Available Date: Jun 8, 2019
• Journal: European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Taylor & Francis (Routledge)
• Peer Reviewed: Peer Reviewed
• Volume: 18
• Issue: 8
• Pages: 709-735
• Keywords: credit ratings, rating likelihood, rating determinants, probit
• Public URL: https://uwe-repository.worktribe.com/output/949943
• Publisher URL: http://www.tandfonline.com/
• Related Public URLs: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2011.649215