Form or Substance? Incomplete Disambiguation of Credit Ratings in Syndicated Bank Loans

78 Pages Posted: 11 Nov 2020 Last revised: 16 Mar 2023

See all articles by Aysun Alp Paukowits

Aysun Alp Paukowits

University of Maryland

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School

Date Written: March 15, 2023

Abstract

Corporate credit ratings have tightened substantially and very gradually over two decades. We test whether the tightening has spillover effects in the market for syndicated loans. We find that this is indeed the case. Across several specifications, we find that loan spreads do not disambiguate ratings conservatism. The incomplete adjustment impacts the costs of bank borrowing, particularly for bank-dependent borrowers such as small firms or newly rated borrowers, who should benefit from being rated but incur higher borrowing costs because their bank loan spreads do not reflect their stricter credit ratings. Thus, frictions in the rating process find their way into other parts of the financial market because form - rather than substance alone - matters, even when institutional investors are the only participants in a marketplace.

Keywords: Credit ratings, ratings conservatism, syndicated loans, bank lending

JEL Classification: G21, G24, G14, G12

Suggested Citation

Alp Paukowits, Aysun and Prabhala, Nagpurnanand, Form or Substance? Incomplete Disambiguation of Credit Ratings in Syndicated Bank Loans (March 15, 2023). Available at SSRN: https://ssrn.com/abstract=3706576 or http://dx.doi.org/10.2139/ssrn.3706576

Aysun Alp Paukowits (Contact Author)

University of Maryland ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
+1 410 234 4532 (Phone)

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