Modelling the Persistence of Credit Ratings When Firms Face Financial Constraints, Recessions and Credit Crunches

Making accurate predictions of corporate credit ratings is a crucial issue to both investors and rating agencies. Recent events have drawn attention to ratings agencies methods. In this paper we investigate the determinants of credit ratings as a function of financial variables; we then consider whether there is persistence in ratings for different types of .rms in recessions and credit crunches. Using data on US Firms rated by Fitch we find substantial evidence of persistence in ratings, and great improvements in prediction as a result. Credit ratings vary for firms facing binding/non-binding financing constraints but do not vary for in recessions/credit crunches and other periods therefore agencies rate "through the cycle".