This study examines whether disaggregated credit ratings offer incremental information about corporate credit risk beyond what is conveyed by aggregated ratings. Using a novel hand-collected dataset of ratings by Morningstar Credit Research, we examine the information value of four disaggregated rating components—business risk, distance to default, cash flow cushion, and solvency score. Controlling for aggregated credit ratings, we find that disaggregated components add value by predicting both the magnitude of future credit risk and key aspects of issuers’ future financial fundamentals. Our results further show that the predictive ability of disaggregated ratings depends on issuer-level characteristics, including ex ante financial constraints and the surrounding information environment.
Shi et al. (Wed,) studied this question.