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Are inflated domestic credit ratings relative to global ratings associated with peer firms’ investment decisions? Evidence from Korea

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  • Oh, Kwang Wuk
  • Kim, Hyun Ah

Abstract

This study investigates the role of inflated ratings in peers’ investments. Using data pertaining to South Korean firms from 2002 to 2013, we find that peer firms belonging to industries that have favorable ratings tend to invest more than control firms do, suggesting that a peer effect exists in terms of credit ratings. Also, the result is primarily observed when firms with inflated ratings are industry leaders. This finding is consistent with the assertion that the peer effect of high-profile firms is relatively larger. An additional test shows that the degree of rating favorableness affects peer investment decisions. Specifically, small or large differences do not affect peers’ investments. Taken together, our findings have academic and practical implications, in that they demonstrate the impact of inflated ratings on real corporate decisions.

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  • Oh, Kwang Wuk & Kim, Hyun Ah, 2019. "Are inflated domestic credit ratings relative to global ratings associated with peer firms’ investment decisions? Evidence from Korea," Japan and the World Economy, Elsevier, vol. 51(C), pages 1-1.
    • Handle: RePEc:eee:japwor:v:51:y:2019:i:c:1
    DOI: 10.1016/j.japwor.2019.04.001
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    Cited by:

    1. Oh, Kwangwuk & Song, Sujin, 2023. "Do female CMOs enhance firm performance? Power matters," Journal of Business Research, Elsevier, vol. 158(C).

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    More about this item

    Keywords

    Credit rating; Inflated rating; Peer effect; Investment; Industry leader;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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