Coarse Credit Ratings, Corporate Financing, and Real Outcomes
41 Pages Posted: 20 Nov 2017 Last revised: 15 Jun 2018
Date Written: June 6, 2018
We study how third-party 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. The new rules made some firms upgraded relative to others within each rating class. We find that upgraded firms enjoy greater and cheaper access to bank credit. Such effects are stronger the higher the cost for banks to screen the borrowing firms. Thanks to the greater access to credit, upgraded firms reduce their reliance on equity, increase their investment and hiring, and are less likely to fail. Overall, our findings uncover a new bank lending technology whereby banks rely on indicators based on hard and soft information produced by a third-party entity.
Keywords: Credit Ratings, Banks, Lending Technology, Corporate Financing, Real Effects
JEL Classification: G32, G33, G21, D82
Suggested Citation: Suggested Citation