Certification and Borrower Outcomes: Evidence from the Introduction of Bank Loan Ratings

I exploit the introduction of syndicated bank loan ratings by Moody’s and Standard & Poor’s in 1995 to examine (a) which firms value certification by a third-party ratings agency, and (b) the effects of certification on financial and real outcomes of borrowers. I find evidence that larger and younger borrowers are more likely to obtain bank loan ratings, but only if they do not have a credit rating before 1995. I also find that the introduction of bank loan ratings leads to increases in the use of debt by firms that obtain a rating, and in increases in firms’ asset growth and cash acquisitions. These findings are strongest among firms that did not have an existing credit rating before bank loan ratings were introduced. The findings suggest that third-party certification services can improve the allocation of capital in the economy, and can increase real outcomes for borrowers that obtain them. *5807 South Woodlawn Avenue, Chicago, IL 60637; email: [email protected]; phone: 773 702 6148; fax: 773 702 0458. I thank Douglas Diamond, Atif Mian, Francisco Perez-Gonzalez, and Joshua Rauh for helpful comments.