Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments September 3, 2019 erstellt
Beschreibung:
We analyze credit ratings' effects on firms' investments in a rational debt-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 credit quality, which is reflected in the rating. The CRA might reduce ex-ante economic efficiency, which results solely from the feedback effect of the rating: 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