Partners in Wine: Entertainment and Credit Ratings

58 Pages Posted: 3 Jun 2021 Last revised: 19 Jan 2023

See all articles by Jess Cornaggia

Jess Cornaggia

Pennsylvania State University - Department of Finance

Feifan Jiang

Industrial Securities Co. Ltd

Jay Y. Li

University of North Carolina at Greensboro

Chenyu Shan

Shanghai University of Finance and Economics

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Date Written: January 16, 2023

Abstract

Recent regulatory reforms seek to address conflicts of interest in the Chinese credit rating industry. Unlike U.S. companies, Chinese companies disclose entertainment expenses. We find a positive relation between abnormal entertainment expenses and ratings and this effect weakens after regulatory changes. Additional analyses based on local culture support a causal interpretation of the entertainment effect on ratings. Entertainment-driven ratings benefit firms via lower financing costs and increased debt capacity. These effects are distortionary, as firms with abnormal entertainment expenses do not default less. Overall, our findings suggest informal relationships facilitate rent seeking in an economy with weak institutions.

Keywords: Credit ratings, Entertainment expenditures, Informal Relationships

JEL Classification: G24, K49

Suggested Citation

Cornaggia, Jess and Jiang, Feifan and Li, Jay Y. and Shan, Chenyu and Tang, Dragon Yongjun, Partners in Wine: Entertainment and Credit Ratings (January 16, 2023). Available at SSRN: https://ssrn.com/abstract=3858235 or http://dx.doi.org/10.2139/ssrn.3858235

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://https://directory.smeal.psu.edu/jnc29

Feifan Jiang

Industrial Securities Co. Ltd ( email )

Shanghai
China

Jay Y. Li (Contact Author)

University of North Carolina at Greensboro ( email )

Department of Accounting and Finance
Greensboro, NC
United States
336 334 5647 (Phone)

Chenyu Shan

Shanghai University of Finance and Economics ( email )

100 Wudong Road
Shanghai
China

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

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