Coarse Credit Ratings, Corporate Financing, and Real Outcomes

36 Pages Posted: 20 Nov 2017 Last revised: 23 Feb 2018

Christophe Cahn

Banque de France - Direction des Entreprises

Mattia Girotti

Banque de France

Federica Salvadè

PSB Paris School of Business

Date Written: February 23, 2018

Abstract

We study how credit rating information influences firms' access to bank 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. Consistently with the hypothesis that banks base their lending decisions on the third-party ratings, we find that upgraded firms enjoy greater and cheaper access to bank credit. They reduce their reliance on equity and cash holdings, and increase their 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

Suggested Citation

Cahn, Christophe and Girotti, Mattia and Salvadè, Federica, Coarse Credit Ratings, Corporate Financing, and Real Outcomes (February 23, 2018). Available at SSRN: https://ssrn.com/abstract=3072891 or http://dx.doi.org/10.2139/ssrn.3072891

Christophe Cahn

Banque de France - Direction des Entreprises ( email )

39 rue Croix des Petits Champs
Paris Cedex 01 75049
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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