An application of fuzzy set theory to determining credit rating for Vietnamese listed firms

Abstract

Assessing company’s creditworthiness plays a significantly important roles to all stakeholders, for example, lenders, investors, suppliers and so on. Nevertheless, the methodologies from international credit rating agencies appears to be wide ranging and complex but their results on Vietnamese companies are not widely available. Vietnam’s fixed-income securities are still immature and their credit rating agencies are still evolving. Thereby, for the purpose of diversifying the approaches for measuring the creditworthiness for Vietnamese companies, this research introduces an innovative method that is a combination of Analytic Hierarchy Process (AHP) and fuzzy set theory to determine a rating class of specific listed company in Vietnam. Moreover, the rating transition matrix theory will be used to investigate the stability of our proposed model. The proposed model requires evaluating credit rating for a company is broken down into three main phases: (1) Applying Fuzzy – Analytic hierarchy process (Fuzzy – AHP) approach to determine the weights of the 13 selected financial ratios influencing a company’s credit rating class. (2) Applying the Fuzzy Set theory to score and rate the company. (3) Using the Transition Matrix theory to calculate a rating transition matrix reporting the transition probabilities of credit ratings of the market between 2014 and 2015. The study found that liquidity is regarded as the most important determinants for assessing the creditworthiness, and company’s valuation is the least important for assessing the creditworthiness.