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Ratings Quality and Borrowing Choice

Author

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  • DOMINIQUE C. BADOER
  • CEM DEMIROGLU
  • CHRISTOPHER M. JAMES

Abstract

Past studies document that incentive conflicts may lead issuer‐paid credit rating agencies to provide optimistically biased ratings. In this paper, we present evidence that investors question the quality of issuer‐paid ratings and raise corporate bond yields where the issuer‐paid rating is more positive than benchmark investor‐paid ratings. We also find that some firms with favorable issuer‐paid ratings substitute public bonds with borrowings from informed intermediaries to mitigate the “lemons discount” associated with poor quality ratings. Overall, our results suggest that the quality of issuer‐paid ratings has significant effects on borrowing costs and the choice of debt.

Suggested Citation

  • Dominique C. Badoer & Cem Demiroglu & Christopher M. James, 2019. "Ratings Quality and Borrowing Choice," Journal of Finance, American Finance Association, vol. 74(5), pages 2619-2665, October.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:5:p:2619-2665
    DOI: 10.1111/jofi.12820
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    Citations

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    Cited by:

    1. Wei Li, 2025. "Investor-Paid Credit Ratings and Managerial Information Disclosure," Management Science, INFORMS, vol. 71(3), pages 2142-2169, March.
    2. Dong, Yi & Hou, Qiannan & Ni, Chenkai, 2021. "Implicit government guarantees and credit ratings," Journal of Corporate Finance, Elsevier, vol. 69(C).
    3. Ya-Fang Wang & Yu-Chu Hsieh, 2023. "Credit Rating and Board Evaluation of Family Firms," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 16(1), pages 7-18, October.
    4. Andreas Barth & Valerie Laturnus & Sasan Mansouri & Alexander F. Wagner, 2021. "ICO Analysts," Swiss Finance Institute Research Paper Series 21-26, Swiss Finance Institute.
    5. Lyu, Huaili & Wang, Wenming & Xu, Si & Zhou, Jingting, 2022. "Individual investment bankers’ reputation concerns and bond yield spreads: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 140(C).
    6. Li, Mingming & Yang, Huaichang & Liu, Haiming, 2025. "Introducing foreign credit rating agency in China: Enhancing reputation or aggravating conflicts of interests?," Finance Research Letters, Elsevier, vol. 73(C).
    7. Beyene, Winta & Delis, Manthos D. & de Greiff, Kathrin & Ongena, Steven, 2025. "Bond versus banks financing in the climate transition: The role of stranded-asset risk," SAFE Working Paper Series 456, Leibniz Institute for Financial Research SAFE.
    8. Andreas Barth & Valerie Laturnus & Sasan Mansouri & Alexander F. Wagner, 2023. "Conflicted Analysts and Initial Coin Offerings," Management Science, INFORMS, vol. 69(11), pages 6641-6666, November.
    9. Huang, Rui & Hooy, Chee-Wooi, 2025. "The impact of client defaults on inflated rating of credit rating agencies: Evidence from China," Finance Research Letters, Elsevier, vol. 85(PA).
    10. Yao, Yanzhen & Wei, Lu & Jing, Haozhe & Chen, Meiqi & Li, Zhan, 2024. "The impact of readability of risk disclosures in bond prospectuses on credit risk premium," Research in International Business and Finance, Elsevier, vol. 70(PA).

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