Financial Factors Determining CAREs Ratings

Rating agencies evaluate a number of qualitative and quantitative factors while assigning rating to a particular company. Standard mathematical formulas do not exist for determining credit ratings. Instead, credit rating agencies use their experience and judgement in assigning ratings. What factors rating agencies consider significant in providing ratings to the companies is an important question. The present study aims to contribute to the above mentioned area by identifying the financial determinants of credit ratings assigned to Indian companies by CARE, one of the top rating agencies of India. Ordered probit analysis is used on unbalanced panel data with credit rating as the dependent categorical variable and six financial factors viz. size, liquidity, profitability, interest coverage, leverage, and growth as the independent variables. Results from ordered probit analysis indicate that the likelihood of credit ratings to be on higher side is more with increase of size, liquidity, profitability, interest coverage, growth and with a decrease in leverage. Further, size, profitability, and leverage are found to be statistically significant factors at the 1% level, liquidity and growth at the 5% level and interest coverage at the 10% level.