Buying on Certification: Credit Ratings and Government Procurement

62 Pages Posted: 20 Dec 2014 Last revised: 29 Jan 2021

See all articles by Xuan Tian

Xuan Tian

Tsinghua University - PBC School of Finance

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: January 28, 2021

Abstract

We examine how credit ratings affect the public and private sectors differently by evaluating customer procurement decisions. Public-sector customers respond strongly to supplier rating changes: they increase purchases from upgraded firms and reduce purchases from downgraded firms. This response is not observed for the private sector. We show the magnitude of the government’s reaction is disproportionate to underlying credit risk, and is likely due to government agents’ desire to respond to ratings, a well-defined certification, to signal their decision-making is aligned with external assessment and to avoid reputational losses. Our paper highlights real effects of credit ratings on the public sector.

Keywords: Credit ratings, rating information, government procurement, public sector

JEL Classification: G24, G28, E62

Suggested Citation

Tian, Xuan and Xia, Han, Buying on Certification: Credit Ratings and Government Procurement (January 28, 2021). Kelley School of Business Research Paper No. 15-8, Available at SSRN: https://ssrn.com/abstract=2540251 or http://dx.doi.org/10.2139/ssrn.2540251

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Han Xia (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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