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RFS Advance Access originally published online on December 11, 2007
Review of Financial Studies 2009 22(4):1659-1691; doi:10.1093/rfs/hhm061
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© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

The Real Effects of Debt Certification: Evidence from the Introduction of Bank Loan Ratings

Amir Sufi
Graduate School of Business, University of Chicago

Send correspondence to A. Sufi, Graduate School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, IL 60637; e-mail: amir.sufi{at}chicagogsb.edu.

JEL Classification: G31, G32, G34, G21


  Abstract

I examine the introduction of syndicated bank loan ratings by Moody's and Standard & Poor's in 1995 to evaluate whether third-party rating agencies affect firm financial and investment policy. The introduction of bank loan ratings leads to an increase in the use of debt by firms that obtain a rating, and also increases in firms' asset growth, cash acquisitions, and investment in working capital. Consistent with a causal effect of the ratings, the increase in debt usage and investment is concentrated in the set of borrowers who are of lower credit quality and do not have an issuer credit rating before 1995. A loan-level analysis demonstrates that previously unrated borrowers who obtain a loan rating gain increased access to the capital of less-informed investors. The results suggest that third-party debt certification has real effects on firm investment policy.

I thank Douglas Diamond, Michael Faulkender, Atif Mian, Tobias Moskowitz, Francisco Perez-Gonzalez, Anil Kashyap, Mitchell Petersen, Joshua Rauh, Michael Roberts, Anthony Saunders, Morten Sorensen, Philip Strahan, and seminar participants at the University of Virginia (McIntire), the University of Illinois, the University of Chicago GSB, the NBER Summer Institute, the FRBNY/Wharton/RFS conference on the Corporate Finance of Financial Intermediaries, Standard & Poor's, and the American Finance Association for helpful comments. I also thank Michael Weisbach (the editor) and two anonymous referees for suggestions that improved the article. Jason Lau provided excellent research assistance.


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