Publication: Ratings quality and borrowing choice
Program
KU-Authors
KU Authors
Co-Authors
Badoer, Dominique C.
James, Christopher M.
Advisor
Publication Date
Language
English
Type
Journal Title
Journal ISSN
Volume Title
Abstract
Past studies document that incentive conflicts may lead issuer-paid credit rating agencies to provide optimistically biased ratings. In this paper, we present evidence that investors question the quality of issuer-paid ratings and raise corporate bond yields where the issuer-paid rating is more positive than benchmark investor-paid ratings. We also find that some firms with favorable issuer-paid ratings substitute public bonds with borrowings from informed intermediaries to mitigate the "lemons discount" associated with poor quality ratings. Overall, our results suggest that the quality of issuer-paid ratings has significant effects on borrowing costs and the choice of debt.
Source:
Journal of Finance
Publisher:
Wiley
Keywords:
Subject
Business, Finance, Economics