The quality of corporate credit rating: evidence from Israel, 2005-2013

Abstract

In the wake of debt restructure in Israel, following a boom in corporate debt issuance, attention was brought to the causes for default, along with its predictability and potential harbingers, such as credit ratings. Using data on Israeli corporate bonds and US defaulters, I suggest the possible risk undervaluation by Israeli credit rating agencies to be of up to 6.12 unaccounted-for rating notches, while yield spreads and other financial indicators alert of a possible default well in advance. Acknowledging that rating agencies are unable to instantaneously reflect new financial information and tend to lag behind the market, my results indicate that Israeli rating agencies provide ratings that are of significantly lower quality than their foreign counterparts. From a series of panel VAR analyses it appears that ratings in Israel are inconsistent with financial indicators, and when adjusted, provide little information to the credit market and often do not affect prices.