Coarse Credit Ratings, Corporate Financing, and Real Outcomes
36 Pages Posted: 20 Nov 2017
Date Written: November 17, 2017
We study how the release of more precise credit rating information influences rated firms' financing and real outcomes. We exploit a refinement in the rating scale that occurred in France in 2004 and led to credit rating upgrades not based on changes in the firms' fundamentals. Consistent with the hypothesis that the refinement reduced asymmetric information between firms and banks, we find that upgraded firms enjoy greater and cheaper access to bank credit. Upgrades also cause decreases in equity and cash holdings, and increases in investment and hiring. Ultimately, upgrades cause a reduction in the firms' probabilities of failure and of defaulting on payments.
Keywords: Asymmetric Information, Credit Ratings, Corporate Financing, Real Effects
JEL Classification: G32, G33, G21, D82
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