Credit Ratings and the Hold-Up Problem in the Loan Market
55 Pages Posted: 20 Nov 2017 Last revised: 22 Dec 2020
Date Written: December 22, 2020
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: Suggested Citation