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Corporate credit ratings: Selection on size or productivity?

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  • Bakhtiari, Sasan

Abstract

Productivity growth is largely driven by the reallocation of resources from less productive firms to more productive ones. Whether corporate credit ratings function in a supportive role is, however, unknown. I use a panel of US manufacturing firms matched to their S&P ratings over the years 1980 to 2009 to investigate. Overall, I find that a typical investment-grade firm is either medium sized and very productive or very large and relatively unproductive. As per evidence, the role of the credit rating system can be best described as disruptive to the reallocation process. These findings are robust to various specification tests and do not seem to be specific to the recent history; the practice only came under spotlight in the recent decade.

Suggested Citation

  • Bakhtiari, Sasan, 2017. "Corporate credit ratings: Selection on size or productivity?," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 84-101.
  • Handle: RePEc:eee:reveco:v:49:y:2017:i:c:p:84-101
    DOI: 10.1016/j.iref.2017.01.023
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    References listed on IDEAS

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    Keywords

    Productivity; Size; Credit rating; Rating agencies; Resource reallocation;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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