Credit Ratings and the Hold-Up Problem in the Loan Market

55 Pages Posted: 20 Nov 2017 Last revised: 22 Dec 2020

See all articles by Christophe Cahn

Christophe Cahn

Banque de France

Mattia Girotti

Banque de France

Federica Salvadè

PSB Paris School of Business

Date Written: December 22, 2020

Abstract

This paper studies whether credit ratings can alleviate the hold-up problem between private, bank-dependent 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: Hold-Up Problem, Bank Relationships, Private Firms, Credit Ratings

JEL Classification: G21, G28, G32

Suggested Citation

Cahn, Christophe and Girotti, Mattia and Salvadè, Federica, Credit Ratings and the Hold-Up Problem in the Loan Market (December 22, 2020). Available at SSRN: https://ssrn.com/abstract=3072891 or http://dx.doi.org/10.2139/ssrn.3072891

Christophe Cahn

Banque de France ( email )

Paris
France

Mattia Girotti (Contact Author)

Banque de France ( email )

Paris
France

Federica Salvadè

PSB Paris School of Business ( email )

59 rue Nationale
Paris, 75013
France

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