Insolvency Risk and Rating are Systematically Ignored

In a remarkable essay, Prof. Dr. Werner Gleißner and Prof. Dr. Ottmar Schneck show the importance and lack of contextual mediation of the insolvency risk in corporate planning. Their conclusion „Theory, methods and practice of rating have thus, in a sense, developed in a niche of business administration and a link to other subject areas has never been established.“

Rating and probability of insolvency are of fundamental importance in business administration.

In the real world, there are rating and financing restrictions that lead to insolvency and the probability of such an insolvency is essential e.g. for business valuation or financing decisions. Up to now, both aspects have received too little attention in business administration, both in theory and in practice. The reason for this is, on one hand the fact that large parts of today’s business administration are based on the neoclassical paradigm of perfect markets, which does not know any rating and financing restrictions and thus no insolvencies.

Rating theory and rating methods, which have developed in a niche of lending decisions, are accordingly insufficiently linked with other areas of business administration. This is certainly also because people tend to dismiss risks in general, and the insolvency risk in particular. A sensitization for the importance of the probability of insolvency, especially in “entrepreneurial decisions” (according to german law § 93 AktG), is necessary. In order to do justice to the importance of the topic in management practice, the topic should be given consistent attention in scientific literature (a publication based on the hypothesis that financial resources are simply available without restriction and that insolvencies cannot occur is unrealistic). This, in turn, is an important basis for ensuring that the topics of rating and the probability of insolvency are adequately considered in management education and in degree programs.