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Rating friends: The effect of personal connections on credit ratings

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  • Khatami, Seyed Hossein
  • Marchica, Maria-Teresa
  • Mura, Roberto

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 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.

Suggested Citation

  • Khatami, Seyed Hossein & Marchica, Maria-Teresa & Mura, Roberto, 2016. "Rating friends: The effect of personal connections on credit ratings," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 222-241.
    • Handle: RePEc:eee:corfin:v:39:y:2016:i:c:p:222-241
    DOI: 10.1016/j.jcorpfin.2016.04.006
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    References listed on IDEAS

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    Cited by:

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    3. Bhandari, Avishek & Golden, Joanna, 2021. "CEO political preference and credit ratings," Journal of Corporate Finance, Elsevier, vol. 68(C).
    4. Nguyen, Quan M.P. & Do, Hung Xuan & Molchanov, Alexander & Nguyen, Lily & Nguyen, Nhut H., 2023. "Political similarities in credit ratings," International Review of Financial Analysis, Elsevier, vol. 86(C).
    5. Jackowicz, Krzysztof & Kozłowski, Łukasz, 2019. "Social ties between SME managers and bank employees: Financial consequences vs. SME managers' perceptions," Emerging Markets Review, Elsevier, vol. 40(C), pages 1-1.
    6. Andrea Fracasso & Valentina Peruzzi & Chiara Tomasi, 2019. "Multiple banking relationships: the role of firm connectedness," DEM Working Papers 2019/3, Department of Economics and Management.
    7. Bing Xu & Jingwen Yang & Bifei Sun, 2018. "A nonparametric decision approach for entrepreneurship," International Entrepreneurship and Management Journal, Springer, vol. 14(1), pages 5-14, March.
    8. James, Hui Liang & Wang, Hongxia & Xie, Yamin, 2018. "Busy directors and firm performance: Does firm location matter?," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 1-37.
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    10. Dong, Yi & Hou, Qiannan & Ni, Chenkai, 2021. "Implicit government guarantees and credit ratings," Journal of Corporate Finance, Elsevier, vol. 69(C).
    11. Klusak, Patrycja & Thornton, John & Uymaz, Yurtsev, 2020. "Do personal connections improve sovereign credit ratings?," Finance Research Letters, Elsevier, vol. 33(C).

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    More about this item

    Keywords

    Executive and director networks; Credit rating; Asymmetric information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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