Rating Friends: The Effect of Personal Connections on Credit Ratings

59 Pages Posted: 11 Aug 2013 Last revised: 1 May 2016

See all articles by Hossein Khatami

Hossein Khatami

University of Manchester - Manchester Business School

Maria‐Teresa Marchica

University of Manchester - Alliance Manchester Business School

Roberto Mura

University of Manchester - Manchester Business School

Date Written: April 23, 2016

Abstract

Using a large sample of US public debt issues we show that personal connections between directors of issuing companies and rating agencies result in higher credit ratings. We estimate the average effect to be about one notch. Moreover, our tests indicate that issues by connected firms are 30% more likely to be rated A3. Results are robust to several alternative tests including additional controls for managerial traits, firm fixed effects, and propensity score matching. Furthermore, our tests on default rates and bond yields suggest that personal connections act as a mechanism to reduce asymmetric information between the rating agency and the issuer.

Keywords: executive and director networks, credit rating, asymmetric information

JEL Classification: D82, G24, L14

Suggested Citation

Khatami, Seyed Hossein and Marchica, Maria‐Teresa and Mura, Roberto, Rating Friends: The Effect of Personal Connections on Credit Ratings (April 23, 2016). Available at SSRN: https://ssrn.com/abstract=2308130 or http://dx.doi.org/10.2139/ssrn.2308130

Seyed Hossein Khatami

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+44791262959 (Phone)

Maria‐Teresa Marchica

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Roberto Mura (Contact Author)

University of Manchester - Manchester Business School ( email )

Crawford House
Oxford Road
Manchester, Lancashire M13 9PL
United Kingdom
+44 (0) 161 275 4023 (Fax)

HOME PAGE: http://www.robertomura.com

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