Rating friends: the effect of personal connections on credit ratings

Seyed Hossein Khatami, Maria-Teresa Marchica, Roberto Mura

Research output: Working paper

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Abstract

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 between half a notch and one full notch. We also follow companies after their public debt issues. Our tests indicate that the higher rating connected companies receive is not due to a favorable treatment by the rating agency. Rather, our evidence indicates that personal connections act as a mechanism to reduce asymmetric information between the rating agency and the issuer.
Original languageEnglish
Number of pages41
Publication statusPublished - 2013

Keywords

  • executive and director networks, credit rating, asymmetric information

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