Credit Ratings and the Hold-Up Problem in the Loan Market: Evidence from a Public Intervention

Abstract

This paper studies whether credit ratings can alleviate the hold-up problem between small opaque firms and informed banks. We exploit a refinement of the rating information produced by a state-owned rating agency and available to all lenders, which causes some firms to receive a positive rating surprise. We show that affected firms enjoy greater and less expensive bank credit, especially from new and less informed lenders. Consequently, they rely less on the informationally powerful lender and invest more. We conclude that credit ratings reduce the informational gap between lenders and erode the rents of informed banks.

Keywords: Credit Ratings, Hold-Up Problem, Banks, Corporate Financing

JEL Classification: G21, G28, G32