Coarse Credit Ratings, Corporate Financing, and Real Outcomes

Abstract

This paper studies whether credit ratings can alleviate the hold-up problem in the loan market. We exploit a refinement of the rating information produced by a certifier that rates private, bank-dependent firms in France on a vast scale. The refinement causes some firms to receive a positive rating surprise that is unrelated to changes in firm fundamentals. We show that affected firms enjoy greater and less expensive bank credit, especially from new and less informed lenders. Consequently, they rely less on the informationally powerful lender and invest more. We conclude that credit ratings reduce the monopoly power of informed banks, helping firms to expand their access to bank credit.