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

Abstract

This paper studies whether credit ratings can alleviate the hold-up problem in the loan market. We exploit a refinement of the rating information produced by a certifier that rates private, bank-dependent firms in France on a vast scale. The refinement causes some firms to receive a positive rating surprise that is unrelated to changes in firm fundamentals. We show that affected firms become less reliant on lenders that have greater ability to extract informational rents. These firms receive greater and less expensive bank credit from new and less informed lenders and invest more. We deduce that credit ratings reduce the monopoly power of informed banks, helping firms to expand their access to bank credit.

Keywords: Banking Relationships, Hold-Up Problem, Switching Costs, Private Firms, Credit Ratings

JEL Classification: G21, G28, G32