Rating friends: The effect of personal connections on credit ratings

Seyed Hossein Khatami, Maria-Teresa Marchica and Roberto Mura

Journal of Corporate Finance, 2016, vol. 39, issue C, 222-241

Abstract: Using a large sample of US public debt issues we show that personal connections between directors of issuing companies and rating agencies result in higher credit ratings. We estimate the average effect to be about one notch. Moreover, our tests indicate that issues by connected firms are 30% more likely to be rated A3. Results are robust to several alternative tests including additional controls for managerial traits, firm fixed effects, and propensity score matching. Furthermore, our tests on default rates and bond yields suggest that personal connections act as a mechanism to reduce asymmetric information between the rating agency and the issuer.

Keywords: Executive and director networks; Credit rating; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 G24 L14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:39:y:2016:i:c:p:222-241

DOI: 10.1016/j.jcorpfin.2016.04.006

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