Credit Rating Inflation and Corporate Innovation

42 Pages Posted: 9 Jun 2022

See all articles by Sean Flynn

Sean Flynn

Cornell SC Johnson College of Business

Bharadwaj Kannan

Colorado State University

Date Written: May 31, 2022

Abstract

Does credit rating quality affect corporate innovation? Using exogenous variation in rating quality that arises from competition among rating agencies, we show that firms with inflated ratings issue more patents, but their patent quality, as measured by scientific and economic value, declines. We provide evidence to show that managers engage in value-reducing patenting activity to exploit a compensation structure that rewards them for the number, but not the quality, of new patents. Our results are stronger in non-technology industries, which suggests that managers strategically exploit innovation when firms do not rely on patenting for value creation.

Keywords: Credit Rating Quality, Innovation, Compensation Packages

JEL Classification: G24, O31, J33

Suggested Citation

Flynn, Sean and Kannan, Bharadwaj, Credit Rating Inflation and Corporate Innovation (May 31, 2022). Available at SSRN: https://ssrn.com/abstract=4124560 or http://dx.doi.org/10.2139/ssrn.4124560

Sean Flynn

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Bharadwaj Kannan (Contact Author)

Colorado State University ( email )

Fort Collins, CO 80523
United States

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