Digest Finance

Improvement of Rating Methodology

Vol. 23, Iss. 2, JUNE 2018

PDF  Article PDF Version

Received: 6 February 2018

Received in revised form: 20 February 2018

Accepted: 6 March 2018

Available online: 30 June 2018


JEL Classification: G24, G32

Pages: 191–211


Brusov P.N. Financial University under Government of Russian Federation, Moscow, Russian Federation

ORCID id: not available

Filatova T.V. Financial University under Government of Russian Federation, Moscow, Russian Federation

ORCID id: not available

Orekhova N.P Southern Federal University, Rostov-on-Don, Russian Federation

ORCID id: not available

Kulik V.L. Financial University under Government of Russian Federation, Moscow, Russian Federation

ORCID id: not available

Importance The article focuses on rating methodologies, their drawbacks and improvement methods.
Objectives The research generalizes the new approach to the rating methodology adjusting it for the Brusov – Filatova – Orekhova modern theory of capital cost and capital structure in relation to corporations of any age.
Methods The research is based on the Brusov – Filatova – Orekhova modern theory of capital cost and capital structure (BFO theory).
Results The article analyzes methodological and systemic drawbacks of the existing credit ratings of non-financial issuers. We incorporate financial ratios used for rating into the general case of the BFO theory. The article also examines how the Weighted Average Cost of Capital depends on coverage and leverage ratios.
Conclusions and Relevance The proposed approach will make ratings more accurate and unbiased. The findings may prove useful to international and Russian rating agencies to evaluate the solvency of issuers.

Keywords: rating, rating methodology, Brusov–Filatova–Orekhova theory, BFO theory, coverage ratio, leverage ratio


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