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Explaining Credit Ratings of Australian Companies-An Application of the Merton Model

Tanthanongsakkun, Suparatana; Treepongkaruna, Sirimon

Description

This paper examines how the default likelihood indicator computed from the option-based model of Merton (1974) together with two default-related factors, namely firm size and book-to-market ratio, effectively explain credit ratings when compared to accounting ratios. Using Australian companies that are rated by Standard and Poor's during 1992-2003 and ordered probit analysis we find that the market-based model is more informative in explaining credit ratings than the accounting-based model.

CollectionsANU Research Publications
Date published: 2008
Type: Journal article
URI: http://hdl.handle.net/1885/25092
Source: Australian Journal of Management

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