Sales Order Backlog and Credit Ratings

Abstract

This study examines the association between sales order backlog and credit ratings. We posit that credit rating agencies consider order backlog as a positive signal about strong future demand and incorporate that into their rating decisions and provide higher ratings to firms with substantial order backlogs. However, being a non-GAAP, unaudited metric, order backlog could also reduce financial reporting quality and hence, credit ratings of firms. Using a sample of US firms from 1980 to 2017, we find a positive and significant association between order backlog and credit ratings, suggesting that order backlog serves as a valuable measure in credit rating assessment by providing positive signals about future earnings to rating agencies.