Unlike the Moody’s model, which considers many
qualitative variables exposed to subjective evaluations, uses
only quantitative variables, objectively determinable.
Moreover, for the purposes of a more immediate and concise
evaluation, only variables present in the RICA archive were
used, which have thus been able to guarantee a comparability over time of the values.
Compared to the Altman EM Score, on the other hand, as
previously indicated, the variables most sensitive to the fiscal policies implemented by the owners of the companies
(i.e., working capital, operating result, and profits) were
excluded, to reach a result the as objective as possible.
Finally, in contrast to both previous models, the existence of
new investments and their incidence with respect to land capital
was considered, consistently with the underlying indication that
the growth of the potential of a company reduces the insolvency
risks (Tagliavini 1998; Venceslai 2008).
Justification of the variables included in the models and
their weights
All the variables chosen from those available in the RICA
archive are the ones that most summarize (combined) the
ability of the assets to be exploited. They are, however, the
only ones that can be used both with reference to agricultural
farming activities and livestock breeding activities.
• Total area available for the company: this variable
highlights the availability (expressed as an absolute
value) of the total land available for the companies and
directly influences the size of investments and the
available land factor. The greater this variable, the greater
the production capacity.
• Total land capital: this variable highlights the extent of
available land (excluding the part of the available area
where there are buildings), thus allowing highlighting
(combined with the previous variable) the part available
for the company’s core business activities.
• New land investments: this variable allows to highlight
the investment capacity for the expansion of the territory
available for the activities and is an excellent indicator of
vitality of the companies that reduces the risk of default.
• Working capital in ownership: It represents the value of
current assets held for the company’s business. This
variable, combined with the capital identified by the land,
represents the set of assets available to businesses and
which can provide a guarantee for creditors.
The weights have been defined ex post, that is, algorithmically reiterating all the combinations of the variables until
obtaining a bell shape (normal trend). The weights assigned
to the variables are therefore statistically significant by
absolute definition, such as the statistical and economic literature review.
Justification of the focus on Italian companies
Complete archives relating to agricultural enterprises, which
are often small, are really rare. The widespread analysis
imposed by the European Union to the member countries has
resulted in the creation of the RICA Italian archive, which
the authors have had the precious opportunity to have the
availability.
The RICA archive complies with the directives indicated
by the European Union and respects all the scientific criteria
of detection and composition, so it seemed perfect to the
authors to base their research.
If it were possible to find similar archives from other
European Union countries it would be possible to extend and
further verify the assumptions. Nor is it possible to replicate
at government level the request to implement the same type
of archive even in any country in the world.
6 Findings: Results and Related
Considerations
Transition matrices calculate the ex-post probability that the
creditworthiness assigned to an issuer at the beginning of a
different period (following a downgrading or upgrading),
e.g., remains in the same rating class at the end of the period
considered. For each specific degree of accuracy of the rating, the lower the rate of migration from one rating class to
another, the more the rating is reliable (and stable). Therefore, one of the objectives of the agencies is to minimize the
transitions from one rating class to another. This eventuality
represents an objective reliability test of the implemented
rating methodology.
More generally, attention should be given to any downgrading, as the worsening of the opinion expressed on the
credit risk of a company could, in turn, trigger a
self-fulfilling spiral of the forecast, making the synthetic
judgment of the model unreliable. In this regard, on a global
level, it has been observed, in fact, that agencies can increase
systemic risk through significant and not early downgrading;
sudden downgrading can cause large market losses due to
sudden sales of downgraded securities, liquidity problems
and obvious systemic domino effects on market participants
through regulation, supervisory policies, contractual clauses,
and customary practices. Investment (Ferri et al. 2009).
The methodological application carried out on the RICA
archive for the companies considered, showed that as many
as 71.41% (3,976 companies) of the total number of companies surveyed (5,568) maintained the same rating over the
Measurement of Financial and Asset …
117
qualitative variables exposed to subjective evaluations, uses
only quantitative variables, objectively determinable.
Moreover, for the purposes of a more immediate and concise
evaluation, only variables present in the RICA archive were
used, which have thus been able to guarantee a comparability over time of the values.
Compared to the Altman EM Score, on the other hand, as
previously indicated, the variables most sensitive to the fiscal policies implemented by the owners of the companies
(i.e., working capital, operating result, and profits) were
excluded, to reach a result the as objective as possible.
Finally, in contrast to both previous models, the existence of
new investments and their incidence with respect to land capital
was considered, consistently with the underlying indication that
the growth of the potential of a company reduces the insolvency
risks (Tagliavini 1998; Venceslai 2008).
Justification of the variables included in the models and
their weights
All the variables chosen from those available in the RICA
archive are the ones that most summarize (combined) the
ability of the assets to be exploited. They are, however, the
only ones that can be used both with reference to agricultural
farming activities and livestock breeding activities.
• Total area available for the company: this variable
highlights the availability (expressed as an absolute
value) of the total land available for the companies and
directly influences the size of investments and the
available land factor. The greater this variable, the greater
the production capacity.
• Total land capital: this variable highlights the extent of
available land (excluding the part of the available area
where there are buildings), thus allowing highlighting
(combined with the previous variable) the part available
for the company’s core business activities.
• New land investments: this variable allows to highlight
the investment capacity for the expansion of the territory
available for the activities and is an excellent indicator of
vitality of the companies that reduces the risk of default.
• Working capital in ownership: It represents the value of
current assets held for the company’s business. This
variable, combined with the capital identified by the land,
represents the set of assets available to businesses and
which can provide a guarantee for creditors.
The weights have been defined ex post, that is, algorithmically reiterating all the combinations of the variables until
obtaining a bell shape (normal trend). The weights assigned
to the variables are therefore statistically significant by
absolute definition, such as the statistical and economic literature review.
Justification of the focus on Italian companies
Complete archives relating to agricultural enterprises, which
are often small, are really rare. The widespread analysis
imposed by the European Union to the member countries has
resulted in the creation of the RICA Italian archive, which
the authors have had the precious opportunity to have the
availability.
The RICA archive complies with the directives indicated
by the European Union and respects all the scientific criteria
of detection and composition, so it seemed perfect to the
authors to base their research.
If it were possible to find similar archives from other
European Union countries it would be possible to extend and
further verify the assumptions. Nor is it possible to replicate
at government level the request to implement the same type
of archive even in any country in the world.
6 Findings: Results and Related
Considerations
Transition matrices calculate the ex-post probability that the
creditworthiness assigned to an issuer at the beginning of a
different period (following a downgrading or upgrading),
e.g., remains in the same rating class at the end of the period
considered. For each specific degree of accuracy of the rating, the lower the rate of migration from one rating class to
another, the more the rating is reliable (and stable). Therefore, one of the objectives of the agencies is to minimize the
transitions from one rating class to another. This eventuality
represents an objective reliability test of the implemented
rating methodology.
More generally, attention should be given to any downgrading, as the worsening of the opinion expressed on the
credit risk of a company could, in turn, trigger a
self-fulfilling spiral of the forecast, making the synthetic
judgment of the model unreliable. In this regard, on a global
level, it has been observed, in fact, that agencies can increase
systemic risk through significant and not early downgrading;
sudden downgrading can cause large market losses due to
sudden sales of downgraded securities, liquidity problems
and obvious systemic domino effects on market participants
through regulation, supervisory policies, contractual clauses,
and customary practices. Investment (Ferri et al. 2009).
The methodological application carried out on the RICA
archive for the companies considered, showed that as many
as 71.41% (3,976 companies) of the total number of companies surveyed (5,568) maintained the same rating over the
Measurement of Financial and Asset …
117