Linear model formulation of rating methodology practiced by Indian credit rating agencies

Abstract

Abstract An objectve rating system as adopted by international rating agencies holds the key to providing inputs neede for making the right "risk-adjusted "investment decision within the shortest possible time. Unique characteristics of business failures are examined in order to specify and quantity the variables that are effective indicators of corporate distress . Specifically this study analyzes a set of financial and economic rations for Indian companies in a corporate distress prediction context. Beaver's (1967) univaruate analysis and bankruptcy classification thereby setting the stage for future studies involving multivariate analysis. Subsequent works especially those by Altman (1968 and 1977) used multivariate analysis to develop a Z-score model relevant for Indian companies using Multipke Discriminant Analysis. MDA classifies an observation into one of several a priori groupings dependent upon tha observations individual characteristics. The key ratios found to be significant in the model measure the return on assets debt service and liquidity of a firm . The study attempts to identify differences between the listed rations and those used by rating agencies.