The usefulness of contingent claims analysis in predicting corporate credit ratings
Contingent claims analysis, Credit ratings, Default risk, Financial ratios
Academy of Accounting and Financial Studies Journal
Recent research on credit risk focuses on contingent claims analysis, under which the probability a firm will default on its debt can be estimated using equity market and accounting data. As most of this research focuses on the usefulness of contingent claims analysis in the prediction of default and bankruptcy, relatively little attention has been paid to its use in the prediction of corporate credit ratings. This study utilizes a sample of U.S. manufacturing firms to examine the incremental usefulness of the contingent claims framework for predicting issuer credit ratings, given a set of basic accounting ratios. While the results generally indicate that a distance-to-default (DTD) measure derived from the contingent claims framework provides incremental information, notable exceptions occur with AA and A-rated firms. Further testing reveals that information is lost when the theoretical determinants of default risk are combined into a single DTD measure. These results are consistent with research that finds the contingent claims model less useful for investment grade bonds. © 2011 by the DreamCatchers Group, LLC, Arden NC, USA.
Department of Accounting
Original Publication Date
Bauman, Mark P., "The usefulness of contingent claims analysis in predicting corporate credit ratings" (2011). Faculty Publications. 1994.