External Credit Ratings and Bank Lending

Abstract

We study how external, not-for-profit, credit ratings influence banks' lending decisions and firms' real outcomes. We exploit a refinement in this rating information, which makes some firms receive a rating surprise. Although this surprise does not alter firms' risk weights in banks' required capital calculation, we find that affected firms enjoy greater and cheaper access to bank credit, start new bank relationships more easily, and invest more. Banks react to the rating surprise more strongly the less they already have information on the borrower. Overall, this suggests that banks use credit ratings for their informational content. Consequently, ratings help reducing the information gap between them.

Keywords: Credit Ratings, Banks, Lending Technology, Corporate Financing, Real Effects, Hold-up problem

JEL Classification: G21, G32