• Mon - Fri: 10 am - 5 pm
  • Mississauga, Ontario, Canada

Global Financial Researches

Researchers are contributing to the Financial World every day.
Follow the most classic and pragmatic Researches of Financial Research Analysts.

Powered By Academy of IFRA®


Credit Rating Inflation and Firms' Investments

We analyze credit rating effects on firm investments in a rational bond financing game that features a feedback loop. The credit rating agency (CRA) inflates the rating, providing a biased but informative signal to creditors. Creditors' response to the rating affects the firm's investment decision and thus its credit quality, which is reflected in the rating. The CRA might reduce ex ante economic efficiency, which results solely from its strategic effect: the CRA assigns more firms high ratings and allows them to gamble for resurrection. We derive empirical predictions on the determinants of rating standards and inflation and discuss policy implications.

Author - Itay Goldstein, Chong Huang
Journal - Journal of Finance

Source -