Coarse Credit Ratings, Corporate Financing, and Real Outcomes
36 Pages Posted: 20 Nov 2017 Last revised: 23 Feb 2018
Date Written: February 23, 2018
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: Suggested Citation