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The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?
Author(s) -
Blume Marshall E.,
Lim Felix,
Mackinlay A. Craig
Publication year - 1998
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00057
Subject(s) - credit rating , debt , bond credit rating , quality (philosophy) , corporate debt , corporate bond , ordered probit , bond , probit model , economics , business , monetary economics , accounting , financial system , actuarial science , credit reference , finance , credit risk , econometrics , philosophy , epistemology
In recent years, the number of downgrades in corporate bond ratings has exceeded the number of upgrades, leading some to conclude that the credit quality of U.S. corporate debt has declined. However, an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings. An ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent, implying that at least part of the downward trend in ratings is the result of changing standards.