How do credit ratings affect corporate investment efficiency?

Di Xiao, Xinyu Yu

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Abstract

This study examines the impact of credit ratings on the efficiency of firms' investments. Using a large sample of US firms, we find a positive relationship between the existence of credit ratings and investment efficiency. The cross‐sectional analyses show the positive relationship is more pronounced for firms with greater information asymmetry and weaker corporate governance. Our results are robust to different methods to address potential endogeneity concerns, alternative measures of key variables, and the inclusion of additional control variables. Overall, the findings support the notion that credit rating agencies enhance information transparency and external monitoring, thereby allowing rated firms to promote investment efficiency. The findings contribute to our understanding of the significant role played by credit rating agencies in shaping firms' investment behaviour and efficiency.
Original languageEnglish
Pages (from-to)(In-Press)
Number of pages22
JournalInternational Journal of Finance & Economics
Volume(In-Press)
Early online date7 Dec 2023
DOIs
Publication statusE-pub ahead of print - 7 Dec 2023

Bibliographical note

© 2023 The Authors. International Journal of Finance & Economics published by John Wiley & Sons Ltd.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

Keywords

  • investment efficiency
  • corporate governance
  • information asymmetry
  • credit ratings

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