Toward an Integrated Rating Methodology for Corporate Risk Detection

Year 2014, Volume: 3 Issue: 1, 18 - 49, 01.03.2014

Guido Max Mantovani Giancarlo Corò Paolo Gurisatti Mattia Mestroni

Abstract

The need to innovate rating methodologies toward an integrated approach is crucial in the Italian financial contest. Currently, the banking system and the economic actors are unable to create effective and efficient information flows to react to the crisis. Banks weakness derives from the adopted rating models, which are mainly based on credit tendencies. They produce cyclical effects on credit availability and are not able to anticipate anticyclical firms’ trends. The separation between financial and industrial analysis might be a driver of such an inefficient flow of information. The aim of the paper is to show a framework for an original rating methodology derived from the integration of industrial and financial analysis, in order to identify best performers in crisis scenarios (i.e. anti-cyclically). Industrial analysis is based on firm heterogeneity approaches to measure three dimension of analysis: innovation, internationalization and growth. Financial analysis focuses on operational return and risks measures and develops an integrated classification of firms using standardized XBRL financial data. Further integration of the two methodologies is used to create the effective set of information needed for an original rating system based on a certainty equivalent model. The case of the very competitive manufacturing firms in Vicenza was considered. The results suggest the efficacy of the proposed methodology in order to identify clusters of best performing firms in crisis scenarios, while the validation test on the post crisis timeframe confirms the anti-cyclical capacity of an integrated rating methodology.

Keywords

Corporate risks, Rating, Firm behavior, Firm performance

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