Informal Relationships and Credit Ratings

65 Pages Posted: 3 Jun 2021 Last revised: 4 Mar 2024

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: February 28, 2024

Abstract

Unlike U.S. firms, Chinese firms disclose entertainment and travel expenses (ETC), a common tool for building business relationships. We find a positive relation between abnormal entertainment expenses and credit ratings and this effect weakens after regulatory reforms designed to improve the integrity of the Chinese credit rating industry. Additional analyses based on local culture support a causal interpretation of the ETC effect on ratings. ETC-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 reduce the informativeness of credit ratings in an environment with weak controls.

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, Informal Relationships and Credit Ratings (February 28, 2024). 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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