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Recent evidence has shown that hybrid models for credit ratings are important when assessing the risk of firms. Within this stream of literature, we aim to provide novel evidence on how hard (quantitative), soft (qualitative), and market information predict corporate defaults for unlisted firms by implementing the Cox proportional hazard model. We address this research question by exploiting a unique proprietary dataset comprising of detailed information on internal credit ratings of European unlisted mid‐sized firms and compute their Merton's distance‐to‐default (DD) measure of credit risk with market data collected on comparable publicly listed companies. Our results show that the bank's use of hard, soft, and market information when assessing the credit ratings of borrowers has a significant influence on the prediction of their defaults. Further, we investigate the significant influence of soft information in predicting corporate defaults by drawing on two separate processes through which loan officers can inject soft information in credit scoring, that is, 'codified' and 'uncodified' discretion. Finally, when we distinguish between the loan officer's discretion to upgrade or downgrade an applicant's credit score, we find that it is the upgrade that is likely to predict a lower probability of a firm defaulting. This study contributes to the policy debate on safeguarding the banking sector's continuity by positing that integrating market information into banks' hybrid methods of credit rating helps to improve the accuracy in predicting unlisted firms' credit risk that is useful to policy makers for the design of future forward‐looking financial risk management frameworks. [ABSTRACT FROM AUTHOR]

By exploiting a unique and proprietary dataset comprising granular deal- and tranche-level data on a global portfolio of securitisation deals, we empirically test the buffer vs the signalling hypothesis of credit enhancements in securitisation. We do so by focusing on one internal credit enhancement associated with the design of financial securities in securitisation, i.e. subordination. This study provides novel evidence on the role played by subordination in securitisation, suggesting that a real dichotomy between the buffer and signalling effects does not hold. Our findings indeed highlight that subordination serves both as a buffer against observable risk and as a signal of unobservable credit quality to third-party investors in the market; moreover, our results are robust to a wide battery of robustness tests. Our findings, of international relevance, contribute to the literature on information asymmetries between originators and investors and offer new policy insights in light of the recent agreement reached by European lawmakers with national governments to revive the European securitisation market. [ABSTRACT FROM AUTHOR]