American Finance Association

Bond Rating Methods: Comparison and Validation Author(s): James S. Ang and Kiritkumar A. Patel Source: The Journal of Finance, Vol. 30, No. 2, Papers and Proceedings of the Thirty-Third Annual Meeting of the American Finance Association, San Francisco, California, December 2830, 1974 (May, 1975), pp. 631-640 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2978740 . Accessed: 06/04/2011 07:33
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THE JOURNAL OF FINANCE

VOL. XXX, NO. 2

MAY 1975

SESSION TOPIC: EMPIRICAL RESEARCH ON CAPITAL MARKETS

SESSION CHAIRPERSON: MARY A. HINES*

BOND RATING METHODS: COMPARISON AND VALIDATION

JAMES S. ANG AND KIRITKUMAR A. PATEL** I. INTRODUCTION

BOND RATINGAGENCIES, such as Moody's and Standard and Poor's,

attempt to classify bonds according to their ex ante probability and magnitude of financial distress (e.g., incidence of default or loss of market value due to deterioration of the firm's prospects). The importance of these agencies' ratings is demonstrated in many cases where such ratings have a significant effect on the offering yield of the bond. Such ratings are also often used by institutionalportfolio managers as a guideline to reflect the level of bond risk. Increasingly, researchers are using financial informationpublished by the firm which pertains to the bond issue to predict bond rating via statistical techniques [8], [11], [12], [13]. Unfortunately, a common characteristicof all these studies is that each has attempted to predict the agencies' ratings. Each has perceived the agencies' ratings as some sort of standard and has attempted to compare its model's prediction with the agencies' ratings which are also predictions. Thus, the crucial question of whether the statistical models or the agencies' ratings are superior has never been answered. Furthermore, since various statistical models applied data from differentsamples and time periods, inference as to their difference is impossible. Before more time and effort are spent on findingnew variables and applyingnew statistical techniques, the adequacy of all rating methods, both those of the statistical methods and those of the agencies in predictingthe probability of financial distress must be determined. The purpose of this study is twofold: (1) To compare the available statistical bond rating methods on their ability to duplicate the Moody's; and (2) To compare all bond rating methods, includingMoody's, on their ability to predict financial distress over different lead times. To further assess the predictive ability of these models, the performanceof various methods is compared with two random selection methods. Section II briefly reviews four statistical models. Following the discussion of the data in section II, comparisons of the various statistical
Cleveland State University. Oklahoma State University. The authors are grateful to P. Larry Claypool, Professor of Statistics, for helpfulsuggestionsin conductingthe statisticalanalysis and to the NationalBureauof Economic Research for furnishingthe basic data on corporate bond issues.
** *

631

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methods' abilities to predict the Moody's ratings are presented in section IV. In section V the ex post loss experience of all the methods is compared. In the final section the conclusions and implications of the study are presented.
II.
SURVEY OF STATISTICAL BOND RATING METHODS

In rating bonds, the agencies use financial ratios and qualitative factors, such-as their subjective judgment concerning the firm's managerial ability, the value of its intangible assets, and its ability to make interest and principalpayments during the lifespan of the bond. Statistical bond rating methods, however, utilize only the quantifiablehistorical data of the firm or the provisions of the bond issue. Financial variables chosen proxies for are those which the researchersconsider the most appropriate liquidity, debt capacity, debt coverage, size (or marketability),the variability of their earnings, and such indenture provisions as subordination. In most cases, the final set of variables chosen is that which best duplicates the agencies' rating. The independent variable in all cases is the coded bond ratings. Since all four existing statistical bond rating models are considered in the following analysis, we shall briefly discuss each model emphasizing its characteristic procedure, variables, and time period covered.
A. Horrigan Model (H)

To predict bond ratings Horrigan [8] used a two-step approach in which the first step consisted of three stages. In the first stage, he regressed the coded ratings of a sample of corporate bond issues on 15 financial ratios. Subject to constraints related to their intercorrelations, the ratios having the highest correlations with the ratings were selected as the most promising variables to include in the regression analysis.1 The independent variables he finally chose were: subordination, total assets, ratios of working capital over sale, net worth over total debt, sales over net worth, and net operating profit over sale. In the second stage, he developed the "best" equation by regressing the coded bond ratingson the selected variables. The third stage aimed at makinga rating scale. The mean of the estimated dependent variables in each of the rating groups was calculated and the differences between the means of adjacent rating groups were bisected, thereby forming a series of estimated intervals. Scores of the new bond were assigned to the rating group according to the interval in which they fell. Horriganclaimed his predictions were correct for 58% of the Moody's ratings during the period 1961-64.
B. West Model (W)

Using a similarresearch procedure, West [13] argued that Fisher's [5] suggested variables had done an excellent job of estimatingrisk premium
1. The regressionprogramused by Horriganis not a stepwise programand hence the elimination of highly correlatedratios from the analysis is largely a matter of judgment.

Bond Rating Methods

633

and that since risk premium is highly correlated with ratings, the same variables should also performwell as predictors of ratings. The variables used in the model all in logarithmic form were: nine year earnings variability,period of solvency, debt equity ratio, and bonds outstanding. The model correctly predicted 62%of Moody's for the 1953cross section and 60% for the 1961 cross section.
C. Pogue and Soldofsky (P-S)

To predict bond ratings Pogue and Soldofsky [12] employed a regression model with a dichotomous (0-1) dependentvariablewhich represents the probability of group membershipin one group of the pair. Separate regressions were run for each pair of successive ratings (e.g., Aaa and Aa, Aa and A, A and Baa, and so on) with the following independent variablesall expressed as a six-year mean: long-termdebt as a percentage of total capitalization, after tax net income as a percentage of net total assets and its coefficient of variation, net total assets, after tax sum of net income, and interest over interest charge. Dummy variables were used to distinguishthe broad industry effect (i.e., industrials,utilities, and rails). At least (n-l) regressions must be performedfor n ratinggroups. A bond is assigned to the group in which its probability of occurrence is the highest. The P-S was able to predict 8 out of 10 bonds in the hold out sample taken from the period 1961-66.
D. Pinches and Mingo (P-M)

The procedure Pinches and Mingo [II] used in developing their model involved the initial screeningof variablesaccomplishedvia factor analysis (35 variables were initially considered), followed by the use of multiple discriminantanalysis to develop the final predictive model. The model incorporates the following variables: subordination(0-1), years of consecutive dividend, issue size, net income over total assets, five-year mean of net income plus interest charge over interest charge, and longterm debt over total assets. Bonds were classified on the probability of group membership.This model correctly predicted roughly65% and 56% of the Moody's ratings for holdout samples in the periods 1967-68and 1969.
III. THE DATA

The basic source of our empirical investigation was the Bond Census Study in punched cards made available by the National Bureau of Economic Research. This data set was chosen because the information requiredfor this study concerns not only the bonds' initial status but also their subsequent performances. The NBER study reports informationon the firm's default status and loss rate at the extinguishmentor the end of the study (1939), whichever is earlier. Also, in order to satisfy our requirementthat a common sample be applied to all models, we needed a fairly large representativedata set. Since it had been reported [1] that the percentage bond default in the years prior to World War II was about 20

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times that of the post-war years, use of the post-war data involves not only the difficult task of collecting data on ex-post financial loss to the investor, but also requires a much larger sample size, to avoid distortion of the methods' accuracy by a very few default cases. Initially all bonds issued in the years 1938, 1936, 1934, 1932, and 1928, which represent bonds with 1, 3, 5, 7, and 11 years of lead time to the end of the study (1939), were chosen.2 Those bonds for which sufficient data for the statistical models could not be found in the Moody's manuals were eliminated. A total of 424 bonds were finally selected.
IV. A COMPARISON OF THE STATISTICAL RATING METHODS' ABILITY TO DUPLICATE MOODY'S RATING

In our attempt to adhere to the intent of the original study, we did everythingpossible to insure the same variables and methods peculiar to the models were used. For each subperiod, the samples were randomly assigned into two equal subsamples: the basic sample and the holdout sample.3 Regression or discriminant analysis was performed for each model in five different subperiods.4,5 The results generally showed unstable coefficients across time periods and lower reported values for R2 in comparison with the original results. For instance, Horrigan and West reported average R2's of 0.56 and 0.74, while we found average R2's of 0.35 and 0.46 respectively. It is possible that the optimum set of coefficients that best fit the agencies' rating would change from time to time. The regression coefficient, in general, has the expected sign and in cases where other than the expected signs were reported, they were generally statisticallyinsignificantat the 5% level. The exception was the cross section 1934 which consistently yielded the poorest fit in all four models. Bond ratings for the hold out samples were predicted based on the estimated coefficient. To further facilitate comparison, we also con2. Virtually all newly issued bonds belong to the first six categories: Aaa to B. Due to the relatively small size of the last two groups (Ba and B), they were combined as one group in our of study. The distributions the 424 bonds in the five years were as follows: 144 (1928), 55 (1932),38 (1934), 115 (1936), 71 (1938). 3. This procedurewas followed since most of the statisticalratingmethods drew basic test and hold out samples from the same time period in at least part of their test. However, this procedure was less than desirablefor the function found was the best fit on the agencies' rating, which was assumed to be known. Thus, it would tend to assign a higherpercentageof correctpredictionof the of to agencies' ratingattributed the statisticalratingmodels. (Elimination firmswithoutcomplete sets of data as requiredby all four models could also introducethe same bias.) Fortunately,it would affect all statisticalratingmodels in the same direction, and for comparativepurposes it would not substantiallyaffect the conclusion reached in subsequent sections. 4. The resultsare too lengthyto reproducehere. They are availablefrom the authorupon request. 5. Since the four statisticalmodels investigatedin the study were developedfrom post-wardata, it is possible to argue that a better "fit" to the Moody's rating could be obtained based on pre-war data. There are two reasons why this procedurewas not followed. First, the intent of the study was to comparethe performanceof the existing models, and not to create a new model. Secondly and possibly more important,we think these authors would like to consider their models as at least ratherthan developed as a result of milkingthe data. Thus, the list of variables "semi-structural" would not be expected to change from period to period. (We did, however, allow the coefficientsto be reestimatedfor all five cross sections.)

Bond Rating Methods

635

structed two naive prediction models. In the first model (N-1), bonds were randomly assigned to rating groups which were assumed to have equal distributions. Since in reality bonds of different ratings are not equally distributed, the second naive model (N-2) randomly assigned bonds to ratinggroups accordingto the distributionby Moody's of newly assigned bonds in a prior year. Table 1 and Table 2 present respectively the per cent of correct predictions made by each of the models plus the two naive models in the
TABLE 1
PERCENTAGE CORRECT IN THE PREDICTION HOLD OUT OF THE SAMPLES MOODY'S RATING

P-S 1928 1932 41.66 59.25

W 41.66 25.92

P-M 37.50 50.00

H 33.33 44.44

N-1 27.77 18.51

N-2 15.71 16.00

1934
1936 1938 Mean % Mean Rank

31.57
49.12 48.57 46.034 1.20

31.57
40.35 34.28

21.05
45.61 40.00 38.832 2.60 TABLE 2

21.05
25.00 26.47 30.058 4.00

15.78
17.54 17.14 19.348 5.70

21.05
27.27 17.14 19.434 4.90

34.756
2.60

PERCENTAGE

CORRECT IN

PREDICTION THE HOLD

WITHIN OUT

?t1 MOODY'S

RATING

SAMPLES

(% + lCorrect Prediction) P-S 1928 1932 1934 1936 1938 Mean % Mean Rank 81.94 96.29 78.94 94.73 85.71 87.52 1.70 W 88.88 62.95 78.94 89.47 80.00 80.00 2.70 P-M 81.94 88.46 84.21 91.22 85.71 86.31 1.80 H 69.44 85.18 63.15 75.00 76.47 73.85 4.00 N-1 69.44 59.25 42.10 50.87 48.57 54.05 5.70 N-2 41.42 64.00 63.15 63.63 54.28 57.30 5.10

cross section, and the percentage of correct predictions within one rating class. The overall mean percentage of correct predictions is also reported.6 To investigate the degree of significant differences among different methods in predicting the Moody's rating, we performed three statistical tests. First, we tested for equality of group means, and found that the calculated F values for both tables far exceeded the theoreticalF values at the 5% level. Examiningthe rank order only, we found a fairly consistent pattern in which roughly P-S ranked first, P-M second, W third, H fourth, N-1 fifth, and N-2 sixth. Next, we tested the equality of group means among groups [10]. The purpose of this test was to cluster
6. It may also be interestingto note that our duplicationsof Horrigan'smodels and Pinches and Mingo'smodel had the same difficultyof accuratelypredictingBaa, the cutoff point for the so-called investment class.

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homogeneous groupings and differentiate dissimilar groupings. The groupingof means found in each group are as follows: For Table 1 there were three groups, P-S; P-M, W, H; N-I and N-2.7 There were only two groups in Table 2, P-S, P and S, P and M, P-M, W, H; N-I and N-2. The results substantiateclaims by most statistical rankingmethods that they duplicate Moody's better than the random selection models where both random selection methods were consistently and significantlyinferior to the statistical ratingmethods. The mannerin which bonds were randomly assigned to the ratings made no difference. The final test was the kappa statistic [6] which measurednominal scale agreement among the raters (models) and the extent of agreement in assigning a bond to a given category (ratingclass). Under the hypothesis of no agreement beyond chance, K/SE(K) will be approximatelydistributed as a standardnormal variate. Two subtests were performed. Using the ratings assigned by various methods, the first test indicated whether the overall agreement in assignment to the five ratings was significantly greater than chance. For all four statistical rating models, the K statistic demonstratedthat the four statistical methods agreed significantlyat the 5% level except for the 1934 cross section.8 The second statistical test checked the degree of agreementin each of the five rating categories for each cross section. The results indicated that, except for 1934, all methods have a high degree of agreementfor the top ratingAaa, and also for all ratings except A in 1936. In 1938, the agreementin assignment to class Baa is significantlybetter than chance at the 5% level. Thus, it was only for the top rated Aaa that all four methods consistently agreed, where possibly the general superiority of these firms' financial records made it easy to differentiate them from lower rated bonds.
V.
VALIDATION OF BOND RATING METHODS: Ex POST PERFORMANCE AGAINST ACTUAL FINANCIAL DISTRESS EXPERIENCE

The only test of any bond rating method's usefulness is its ability to predict actual financial distress. To compare actual financial distress experiences for different ratinggroups of various methods, a standardof comparison needs to be found. Note that first of all, we can only compare ex post and not ex ante probability of financial risk. Secondly, since the accuracy of Moody's
7. A possible reason for the relative success of the P-S model in predicting Moody's more successfully than others is their approachof allowingdifferentcoefficientsfor the same independent variablesbetween differentsuccessive ratingswithoutassumingthat populationcovariancematrices for the independentvariablesare the same for all classifications.Also see [12] for criticismof the multiple discriminantanalysis to bond rating. 8. As reportedearlier,the statisticalresultsfor the same cross sections were uniformlypoor for all four models. A possible explanationwas that the firmsthat were able to issue bonds in this period were exceptionallystrongfirms.An indicationis the relativelysmall size of bond issue in the sample (38). The agency might actually look beyond the unusually low financialratios of the depression judgmentof the firm.Thus, it mightbe inferredthat the periodand weigh more heavily its qualitative ability of the statisticalrankingmethods to duplicateMoody's will be greatest when financialratios are also most stable duringthe precedingperiods.

Bond Rating Methods

637

rating is also in question, its ex post financial loss experience could not be used as the standard of comparison. Thus it is necessary to create from the ex post data a reference value of financial loss for each rating class that possesses the desirable property where average measures of financialdistress in the reference groups are monotonicallyrelated to the implied quality of the reference ratingclass (e.g., the measure of financial loss for reference group AAA should be lower than that of reference group AA, reference group AA lower than that of A, etc.). To do this, we first listed and rankedall bonds in a given cross section accordingto their ex post measure of financial loss (i.e., from a low to a high loss rate). Then, the bonds were assigned (from the top of the list) to a reference rating class, from high to low (e.g., the top 20 per cent of the ranked bonds were assigned to reference group AAA, the second 20 per cent to AA, etc.). The reference rating classes are assumed to be uniformly distributed.9Finally, an average measure of financial loss is calculated for each reference group by averagingthe measure of financialloss for all bonds in the group. By this procedurewe calculated the reference groups average for both measures of financial loss separately for all five cross sections. Since by design bonds with lower financial loss are always assigned to higher ranking,the requirementthat the average measure for each reference group should increase monotonicallywith decreasing implied rating quality is satisfied. To compare the ex post accuracy of each rating method, a convenient procedure is to calculate the squared difference between the actual financial distress experience of bonds assigned by each rating method including Moody's and the average of the reference group with the same rating.10For example bond X had a default status of 0.25 and was assigned by method 1 into rating class A. If the average default loss for reference group A is 0.10, then the squared difference is calculated as (0.25 - 0.10)2. The overall predictive accuracy of each rating method is summarized as the sum of the squared differences.
n k

MSE

,(Dij

- Ref3)2

(1)

Where N was the total numberof bonds being validatedfor a given rating method, k was the number of bonds assigned by the method to the ith
9. Since the implied probabilityof financialloss for each rating class is not observable, it is necessary to makecertainassumptionsin orderto arriveat its surrogate,the referenceratinggroups. The reference groups are assumed to be the "ideal" assignment with perfect informationwhere bonds with lower ex post financialloss are always assigned to a high ratingclass. Thus, comparison of each rating method with the reference group yields the degree of deviation between the actual of of performance the methodand the "ideal." The second assumptioninvolves the distribution the our referencegroup. Since we have no a prioriknowledgeof the distribution, assumptionof uniform distributionis probablyjustified. Furthermore,we have also experimentedwith the alternativeof of using the distribution the prior year's Moody's assignment,which allows the percentageassigned to each rating class to be different from year to year. The results in terms of MSEs ranking, however, were almost identical with those of a uniformdistribution. gained, the 10. Since there were only five rankinggroupsi.e., ratingclass, in termsof information use of regressioncomparingthe actual measures of financialdistress with those of the reference groups for each method would not be as efficient as the method outlined above.

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ratingand n was the numberof ratinggroups. Dij was the coded value of financial loss, (i.e., default rate or loss rate) and Refj was the reference for the jth rating. In reality, there were at least two measures of ex post financial distress. The first was the default experience. The NBER data reported different default statuses. The following weights were assigned to facilitate computations.
Default Status Value Assigned

If outstandingat extinguishment,or at the 0.00 end of the study in good standing If outstandingin good standing, but with 0.25 indication or prior delay or impairment If interest in default, but not followed by 0.50 default in principal 0.75 If principalpayment delayed or impaired in default followed by default If interest 1.00 in principal Another measure was the loss rate, which was the difference between the realized yield and the promised yield. When properlyinterpreted,the loss rate measures the loss in marketvalue of the bond due to deteriorating financial conditions. However, since the promised yield contained roughly two components-the time value or risk-free yield and the risk premium-computed loss rate might be distorted if the risk-free yield changed over time. To retain as much as possible the effects of default and impairmentof credit prospects and at the same time eliminate the influence or risk-free yield, we modified the loss rate as follows:
Loss rate = (Yoi&j) - (Yri
-(Roj -

Rri)
Rr,j)]

(2)

= Yoi -[Yri

was the U.S. realized yield as reported in the NBER study, and R&,j government bond yield on a similar maturityissue at offer. Rr,i was the U.S. government bond yield on a similar maturity issue at extinguishment or at the end of the study, whichever was earlier.11 Tables 3 and 4 present respectively the MSEs for both default and loss rate. The results showed that: (1) Based on simple rank order, the P-S model was again ranked first overall, with the Moody's rating next, followed by P-M, W, and H. The patterns for the last three were less than consistent. Closer examinations revealed only two cross sections, 1936 and 1938, where the group MSE was statistically significantat the 5% level. Within these two years, a test of the equality of group MSEs among groups revealed two groups: P and S. P and M, Moody's, and W versus H. N-1, and N-2, in 1936; and P-S, P-M, Moody's, H. and W versus N-1, and N-2, in 1938. Analyzing the trends of MSEs over differentlead times, we found that,
11. The risk free yields were read from extrapolatedyield curves of U.S. governmentbond at the date of issue and at the end of the study or the date of extinguishment,whichever was earlier.

Where Y0,i was the promised yield of bond i, Yr,,i was the observed

Bond Rating Methods

TABLE 3
SUMMARY TABLE OF DEFAULT Loss CrossSection MSEs

639

Moody's

P-S

P-M

N- I

N-2

1928 1932 1934 1936 1938

0.06277 0.01417 0.13328 0.01285 0.02294

0.05985 0.02329 0.11105 0.01136 0.00151

0.08823 0.02329 0.14868 0.01711 0.05186 TABLE 4

0.11453 0.01472 0.10421 0.02031 0.00159

0.11132 0.02329 0.11105 0.02805 0.01617

0.08889 0.03501 0.22223 0.03283 0.09513

0.11258 0.07328 0.12644 0.02724 0.05389

SUMMARY TABLE OF ADJUSTED Loss CrossSection

RATE MSEs

Moody's

P-S

P-M

N-i

N-2

1928 1932 1934 1936 1938

14.1629 0.4402 6.6330 0.0966 0.1073

15.4348 0.3669 5.3006 0.0734 0.1004

20.9698 0.3669 5.9679 0.1980 0.0892

25.3889 0.4571 3.5327 0.1997 0.0926

25.7504 0.3669 5.0956 0.3275 0.0879

21.3340 0.3827 7.2935 0.5162 0.3700

24.862 0.5614 4.2199 0.4612 0.2257

in general, the degree of accuracy of all models deteriorates as the lead time lengthens, except for the troublesome 1934 cross section. The results also seemed to be influenced more by the prevailing market conditions for the cross section and by the lead time more than by the difference in the performanceof differentmodels. This was evidenced by the fact that calculated MSEs along the cross section are closer to each other than the intertemporalMSEs. Thus, various bond rating methods were only able to perform better than the random selection methods when the lead time was short (i.e., one year for 1938, and three years for 1936). Over longer lead times, the differences in performance between various methods including random selection were hardly statistically significant. A mild surprise was the ability of most statistical rating methods using only published financial informationto do as well as Moody's. However, these results were not entirely unexpected. For instance, Altman's [2] study on bankruptcy revealed that beyond two years, financial ratios were virtually useless as a predictive tool of a firm's failure. While other studies [7], [9] had indicated a correlation between actual incidence of default and the agencies' ratings, the lead times also were short, usually ranging from two to four years. Furthermore, the inabilityof agencies and other methods to forecast long-termprospects of financial loss should be expected. This is evidenced by the fact that security analysts also have rathershort-termforecasting horizons [3], and generally poor forecasts [4].
VI. CONCLUSIONS

We have found that, at the present state of the art, most statistical bond rating methods do as good a job as the agencies' rating at a much

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lower cost when the objective is to forecast short-term probability of financialloss. We shall, however, caution the use of the statistical rating models because, given the general instability of the coefficients over differenttime periods for all models, there is a need for constant revision and updating of the model's coefficient and, possibly, its variables. But before we attempt research on attempts to find better variables and classification methods, we should be reminded of the failure of all existing models to predict financial loss in the intermediateand long term, a horizon more realistic to the actual maturityof issued bonds. Therefore, a more urgent need is to develop a more rigorous multiperiodtheory of financial distress. This study also points out the danger in overemphasizing the importance of agencies' ratings, and especially their effect on the pricing of new issues, since their ability to predict long-term financial loss probabilities is in question. At the present time, firmsdesiringa high ratingfor their long-term bonds should time their bond issues when they have good-looking financial ratios in the immediate past and expect them to continue to look good in the immediatefuture. Thus it seems that the role of bond rating in long-term bond pricing must be reevaluated. Finally, since a bond rating is not a good indication of long-run risk of financial loss, investors and institutions with relatively long planning horizons should not use it as guidelineto investment. Rather, they should diversify across all rating groups or even concentrate on lower ratingbonds if the analyst is confident that the probability of the firm being solvent in the next few years is high.
REFERENCES 1. Thomas R. Atkinson and Elizabeth T. Simpson. "Trends in CorporateBond Quality," New York: National Bureau of Economic Research, 1967. 2. Edward I. Altman. "Financial Ratios: DiscriminantAnalysis and Prediction of Corporate Bankruptcy,"Journal of Finance (September, 1968), pp. 589-609. 3. Ralph Bing. "Survey of Practitioner'sStock ValuationMethods," Financial Analyst Journal (May-June, 1971), pp. 55-60. 4. J. C. Craiggand Burton Malkiel. "The Consensus and Accuracy of Some Predictionof the Growth of CorporateEarnings,"Journal of Finance (March, 1968), pp. 67-84. 5. Lawrence Fisher. "Determinantsof Risk Premium on Corporate Bonds," The Journal of
Political Economy (June, 1969), pp. 217-237.

6. Joseph L. Fleiss. "MeasuringNominal Scale AgreementAmong ManyRaters," Psychological Bulletin, Volume 76, No. 5, 1971, pp. 378-382. 7. W. Braddock Hickman. "Corporate Bonds: Quality and Investment," National Bureau of Economic Research (PrincetonUniversity Press), Volume 1-4, 1958-1960. CreditStandingWithFinancialRatios," of 8. James 0. Horrigan."The Determination Long-Term EmpiricalResearchin Accounting:Selected Studies, 1966,Supplementto Volume4, Journal 9. Ramon E. Johnson. "Term Structure of Corporate Bond Yield as a Function of Risk of Default," Journal of Finance (May, 1967), pp. 313-345. 10. John Riffe Murphy."Proceduresfor Groupinga Set of Observed Means," UnpublishedPh.D. Dissertation,OklahomaState University, July, 1973. Analysis of IndustrialBond Ratings," 11. George E. Pinches and Kent A. Mingo. "A Multivariate
Journal of Finance (March, 1973) pp. 1-18. of Accounting Research, pp. 44-62.

12. Thomas F. Pogue and RobertM. Soldofsky. "Whatis in a Bond Rating?"Journalof Financial
and Quantitative Analysis (June, 1969), pp. 201-228.

13. RichardR. West. "An AlternativeApproachPredictingCorporateBond Ratings,"Journal of

Accounting Research (Spring, 1970), pp. 118-127.