0 PREDICTING BANK RATING CHANGES IN THE ASIA PACIFIC REGION: THE ACCURACY OF ACCOUNTING AND STOCK MARKET INDICATORS

We aim to assess the accuracy of accounting and stock market indicators to predict rating changes of Asian banks. We specify a multinomial logit model using upgrades and downgrades by rating agencies and conduct a stepwise process to determine the optimal set of early indicators. We also test for the possible influence of bank size and bank characteristics on the effectiveness of early indicators. Our results indicate that accounting and market indicators are useful leading indicators but that they perform better in explaining future upgrades than downgrades. Specifically, both types of indicators are significant in predicting upgrades but not downgrades of large banks. For small banks, only market indicators contribute to the early detection of downgrades. Moreover, early indicators are only significant in predicting rating changes for banks, which are more focused on deposits and loans activities. Eventually, a higher reliance of banks on subordinated debt tends to improve the accuracy of early indicators