Do credit rating agencies listen to investors’ voices on social media? Evidence from China

We examine the impact of social media on credit rating agency practices, as measured by issuer credit ratings. Information dissemination on social media increases the visibility of issuers, which is expected to exert reputational pressure on rating agencies. Consistent with the aim of rating agencies to mitigate such pressure, we find that credit ratings are lower for issuers with higher levels of information dissemination on social media. This result is more pronounced when online information contains negative sentiment, attracts more interactions, and is disseminated during the period of improvements in online environments. Our analysis confirms that reputational pressure is the mechanism through which social media affects credit ratings. Finally, we show that ratings quality increase with the level of information dissemination on social media. Overall, our results contribute to the literature on the economic benefits of social media, which acts as an informal institution to ensure the effectiveness of credit ratings in emerging economies.