Buying on Certification: Customer Procurement and Credit Ratings

Abstract

We examine how credit ratings affect firm stakeholders, in particular, customers in the supply chain. Public sector customers respond strongly to supplier rating changes: they increase purchases from upgraded firms, and reduce purchases from downgraded firms. This response, however, is not observed for private sector customers. This contrast is likely due to government agents’ desire to respond to ratings, a prevalent and verifiable certification, to signal that their decision-making is aligned with external assessment and to avoid reputational losses. We also find suggestive evidence that powerful politicians use ratings to award government contracts to suppliers located in states they represent.

Keywords: Government procurement, Customers, Supply-customer chain, rating certification, credit ratings

JEL Classification: G24, G28, E62