Online Reputation and Debt Capacity
66 Pages Posted: 9 Mar 2020 Last revised: 31 Jul 2020
Date Written: February 14, 2020
This paper explores the effects of online customer ratings on debt capacity. Using a large sample of Parisian restaurants, we find a positive and economically significant relation between customer ratings and bank debt. We use the locally exogenous variation in customer ratings resulting from the rounding of scores in regression discontinuity tests to establish causality. Customer ratings have more impact on debt capacity when information asymmetry is higher. They affect financial policy through a reduction in cash flow risk and greater resilience to demand shocks. Restaurants with good ratings use their extra debt capacity to invest in tangible assets.
Keywords: online reputation, customer ratings, corporate debt, corporate investment
JEL Classification: G14, G32, L15, L83
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