The Real Effects of Debt Certification: Evidence from the Introduction of Bank Loan Ratings

Abstract

I examine the introduction of syndicated bank loan ratings by Moody's and Standard & Poor's in 1995 to evaluate whether third-party rating agencies affect firm financial and investment policy. I find that the introduction of bank loan ratings leads to an increase in the use of debt by firms that obtain a rating, and in increases in firms' asset growth, cash acquisitions, and investment in working capital. A loan level analysis demonstrates that borrowers that obtain a loan rating gain increased access to the capital of less informed investors such as foreign banks and non-bank institutional investors. The effects of the loan rating are strongest among firms that are of lower credit quality and do not have an existing public bond rating before bank loan ratings are introduced. This pattern suggests that third-party debt certification expands the supply of available debt financing, which leads to real effects on firm investment policy.

Keywords: syndicated loans, loan ratings, credit ratings, certification, capital structure, asset growth, acquisitions

JEL Classification: G20, G21, G30, G32