Factors influencing credit assessment

Abstract

This study examines the perceptions of credit analysts on which factors determine credit risk. A sample drawn from the major international credit underwriters was used to rank a previously derived set of micro-economic variables in terms of their importance as predictors of credit risk and ultimately corporate failure. The study aimed at supplementing the existing empirical research into corporate failure, which has largely been based on the predictive power of financial ratios, with expert perceptions. The results showed that the respondents relied heavily on secondary type data; i.e. the fact that banks had already withdrawn facilities, or that there had been prior instances of fraud or insolvency. The respondent’s own assessment of the primary data was rated of lower importance.

The relative importance of various criteria was also tested, using conjoint analysis. The analysis showed banking history and previous underwriting experience to be the most important assessment criteria, followed by the quality of management. The methodology also demonstrated the ability of conjoint analysis to identify respondents whose approach differed significantly from that of the group, and could therefore assist in identifying training needs amongst credit analysts.

Key Words:

• credit assessment
• corporate failure
• risk
• conjoint analysis