Credit rating model development: An ordered analysis based on accounting data

•We propose and test whether a parsimonious credit rating procedure can produce crucial information.•Based on fundamental publically available information we develop a credit rating model with specific intervals.•We use ordered probit analysis to determine cut-off points for positioning firms into specific credit rating intervals.•We test our results and the prediction power of the model in terms of suspension from the stock market.•We conclude on satisfactory and encouraging results for a market that faced a severe economic crisis after a period of growth.

In this paper we propose and test a methodology for constructing a credit rating model. We follow a polytomous ordered probit analysis leading to the specification of statistically significant credit rating intervals. We test our model with accounting data of Greek listed firms over the years 2004–2013, a period which includes both the pre-crisis growth and the crisis phase of the Greek economy and the stock market. Using the empirically—based rating categories that the model generates endogenously, we observe not only a clear and timely response of ratings to the changing economic environment, but we also obtain significant predictive ability over a period of one, two and three years.