Credit Ratings and the Hold-Up Problem in the Loan Market

55 Pages Posted: 20 Nov 2017 Last revised: 6 Dec 2021

See all articles by Christophe Cahn

Christophe Cahn

Banque de France

Mattia Girotti

Banque de France

Federica Salvadè

PSB Paris School of Business

Date Written: December 3, 2021

Abstract

This paper studies whether credit ratings can alleviate the hold-up problem in the loan market. We exploit a refinement of the rating information produced by a certifier that rates private, bank-dependent firms in France on a vast scale. The refinement causes some firms to receive a positive rating surprise that is unrelated to changes in firm fundamentals. We show that affected firms become less reliant on lenders that have greater ability to extract informational rents. These firms receive greater and less expensive bank credit from new and less informed lenders and invest more. We deduce that credit ratings reduce the monopoly power of informed banks, helping firms to expand their access to bank credit.

Keywords: Banking Relationships, Hold-Up Problem, Switching Costs, Private Firms, Credit Ratings

JEL Classification: G21, G28, G32

Suggested Citation

Cahn, Christophe and Girotti, Mattia and Salvadè, Federica, Credit Ratings and the Hold-Up Problem in the Loan Market (December 3, 2021). Available at SSRN: https://ssrn.com/abstract=3072891 or http://dx.doi.org/10.2139/ssrn.3072891

Christophe Cahn

Banque de France ( email )

Paris
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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