Firm complexity and credit ratings

Abstract

This paper examines the effect of firm complexity on credit ratings. Using a sample of U.S. non-financial firms and the state-of-the-art measure of firm complexity, we document a significantly negative relation between firm complexity and credit ratings, suggesting that rating agencies assign significantly lower credit score to more complex firms. Our results remain robust to alternative specifications and various endogeneity checks. Moreover, we find that the negative effect on credit ratings becomes weaker in more transparent and better-governed firms. Finally, we show that the effect is more pronounced during periods of high policy uncertainty. Overall, our paper provides a better understanding of complex firms and highlights the importance of transparency that enhances creditworthiness and mitigates credit risk.