How do credit ratings affect corporate investment efficiency?

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.