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Positive Externalities of Credit Ratings: Customer Downgrades, Supplier Performance, and Investor Perception

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  • Aaron Nelson
  • Eva (Hui) Liang
  • Wenye Tang

Abstract

This study examines how a change in information about a customer's creditworthiness affects responses to a supplier's financial information, focusing on earnings response coefficients (ERCs). We use a major customer's credit rating downgrade (CCRD) as a change to the information environment. We find that suppliers' ERCs are weaker following a CCRD, consistent with reduced persistence and growth opportunities. We find evidence supporting investors' reactions: after the downgrade, suppliers are more likely to experience a deterioration in customer relationships, reduced operational efficiency and investment and fewer growth opportunities. These findings highlight a positive externality of credit ratings that are created for debt holders, but are also useful to other stakeholders.

Suggested Citation

  • Aaron Nelson & Eva (Hui) Liang & Wenye Tang, 2026. "Positive Externalities of Credit Ratings: Customer Downgrades, Supplier Performance, and Investor Perception," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 66(1), pages 409-428, March.
    • Handle: RePEc:bla:acctfi:v:66:y:2026:i:1:p:409-428
    DOI: 10.1111/acfi.70122
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