Credit Ratings and the Hold-Up Problem in the Loan Market

Christophe Cahn (), Mattia Girotti () and Federica Salvadè
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Christophe Cahn: Banque de France, 75049 Paris, France
Mattia Girotti: Banque de France, 75049 Paris, France
Federica Salvadè: Paris School of Business, 75013 Paris, France

Management Science, 2024, vol. 70, issue 3, 1810-1831

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 not due to an improvement in firm fundamentals. We show that affected firms become less reliant on lenders that have greater ability to extract informational rents. These firms receive greater and less expensive bank credit from new and less informed lenders and invest more. We deduce that credit ratings reduce the monopoly power of informed banks, helping firms to expand their access to bank credit.

Keywords: banking relationships; hold-up problem; switching costs; private firms; credit ratings (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1810-1831

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