Does Rating Information Matter For Bank Lending To SMEs? An Empirical Assessment

Abstract

We study how third-party credit ratings available to banks influence lending decisions to small- and medium-sized enterprises (SMEs). We exploit a refinement in this rating information, which makes some firms receive a rating surprise. Although this surprise does not alter banks' capital requirements, affected firms experience greater and cheaper access to bank credit, start new bank relationships more easily, and invest more. Banks modify their loan supply more the less they know the borrowers, indicating that banks use ratings to learn about them. We conclude that ratings can be important for SMEs' financing and reduce the informational gap between banks.

Keywords: Credit Ratings, Banks, Lending Technology, SMEs, Corporate Financing.

JEL Classification: G21, G32.