The Declining Credit Quality of Us Corporate Debt : Myth or Reality?

In recent years, the number of downgrades in corporate bond ratings has exceeded the number of upgrades. This fact has led some to conclude that the credit quality of U.S. corporate debt has declined. However, declining credit quality is not the only possible explanation. 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 1973 through 1992 suggests that rating standards have indeed become more stringent. The implication is that at least part of the downward trend in ratings is the result of changing standards and does not reflect a decline in credit quality