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Ratings Quality and Borrowing Choice
Author(s) -
BADOER DOMINIQUE C.,
DEMIROGLU CEM,
JAMES CHRISTOPHER M.
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12820
Subject(s) - issuer , debt , incentive , quality (philosophy) , credit rating , business , bond credit rating , intermediary , bond , benchmark (surveying) , actuarial science , economics , finance , microeconomics , credit risk , credit reference , philosophy , geodesy , epistemology , geography
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.