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Corporate credit ratings: Selection on size or productivity?

Sasan Bakhtiari ()

International Review of Economics & Finance, 2017, vol. 49, issue C, 84-101

Abstract: Productivity growth is largely driven by the reallocation of resources from less productive firms to more productive ones. Whether corporate credit ratings function in a supportive role is, however, unknown. I use a panel of US manufacturing firms matched to their S&P ratings over the years 1980 to 2009 to investigate. Overall, I find that a typical investment-grade firm is either medium sized and very productive or very large and relatively unproductive. As per evidence, the role of the credit rating system can be best described as disruptive to the reallocation process. These findings are robust to various specification tests and do not seem to be specific to the recent history; the practice only came under spotlight in the recent decade.

Keywords: Productivity; Size; Credit rating; Rating agencies; Resource reallocation (search for similar items in EconPapers)
JEL-codes: D24 G24 L25 L6 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:reveco:v:49:y:2017:i:c:p:84-101