Buying on Certification: Customer Procurement and Credit Ratings

52 Pages Posted: 20 Dec 2014 Last revised: 15 Jun 2017

Kevin Green

University of Texas at Dallas

Xuan Tian

Tsinghua University - PBC School of Finance

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: June 15, 2017

Abstract

We examine how credit ratings affect firm stakeholders, in particular, customers in the supply chain. We find that changes to suppliers’ credit rating produce dramatically different effects on customer procurement depending on the type of customer. The public sector (i.e., federal government) responds strongly to supplier rating changes: it increases purchases from upgraded firms, and reduces purchases from downgraded firms. In sharp contrast, private sector (non-government) customers do not exhibit such a significant response. We find this contrast is likely due to government agents’ reliance on credit ratings as a verifiable certification to signal competence through procurement decisions and avoid reputational risk. We also find suggestive evidence that powerful politicians might utilize ratings to direct government contracts to suppliers located in states they represent. While existing studies largely document how public sector spending influences private sector corporations, our findings highlight how public sector spending can be influenced by private sector credit ratings.

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

JEL Classification: G24, G28, E62

Suggested Citation

Green, Kevin and Tian, Xuan and Xia, Han, Buying on Certification: Customer Procurement and Credit Ratings (June 15, 2017). 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

Kevin Green

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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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