Rating Friends: The Effect of Personal Connections on Credit Ratings
59 Pages Posted: 11 Aug 2013 Last revised: 1 May 2016
Date Written: April 23, 2016
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
JEL Classification: D82, G24, L14
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