{"id":6617,"date":"2016-06-22T17:07:30","date_gmt":"2016-06-22T17:07:30","guid":{"rendered":"http:\/\/hnews.hult.edu\/?p=6617"},"modified":"2019-07-11T09:53:48","modified_gmt":"2019-07-11T09:53:48","slug":"rating-friends-the-effect-of-personal-connections-on-credit-ratings","status":"publish","type":"post","link":"https:\/\/www.hult.edu\/blog\/rating-friends-the-effect-of-personal-connections-on-credit-ratings\/","title":{"rendered":"Rating Friends: The Effect of Personal Connections on Credit Ratings"},"content":{"rendered":"<p>In their paper &#8220;Rating Friends: The Effect of Personal Connections on Credit Ratings&#8221; \u00a0<a href=\"https:\/\/www.hult.edu\/en\/about-us\/faculty\/hossein-khatami\/\" target=\"_blank\" rel=\"noopener\">Hossein Khatami<\/a>, professor of finance at Hult,\u00a0Maria-Teresa Marchica, and Roberto Mura, investigate the impartiality and independence of credit issuing companies and \u00a0credit rating agencies in the U.S.<\/p>\n<p>In their study, they found that personal connection between directors of these companies\u00a0may impact the quality of credit ratings in several ways.<\/p>\n<p>The paper was published in <em>The Journal of Corporate Finance\u00a0<\/em>and you can read the paper in full <a href=\"http:\/\/www.sciencedirect.com\/science\/article\/pii\/S0929119916300529\" target=\"_blank\" rel=\"noopener\">here<\/a>.<\/p>\n<p>Khatami, S. H., Marchica, M., &amp; Mura, R. (2016). Rating Friends: The Effect of Personal Connections on Credit Ratings. Journal of Corporate Finance.<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Abstract<\/strong><\/span><\/p>\n<p>Using a large sample of U.S. public debt issues we show that personal connections between directors of issuing companies and rating agencies result in higher credit ratings. We estimate the average effect to be about one notch. Moreover, our tests indicate that issues by connected firms are 30% more likely to be rated A3. Results are robust to several alternative tests including additional controls for managerial traits, firm fixed effects, and propensity score matching. Furthermore, our tests on default rates and bond yields suggest that personal connections act as a mechanism to reduce asymmetric information between the rating agency and the issuer.<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Highlights<\/strong><\/span><\/p>\n<p>\u2022\u00a0We report that ceteris paribus, issues by connected firms receive higher ratings<br \/>\n\u2022\u00a0The average difference in rating between issues by connected and unconnected firms is about one notch<br \/>\n\u2022\u00a0The higher ratings of connected companies are not due to favorable treatment but they reflect lower asymmetric information<\/p>\n<p>&nbsp;<\/p>\n<p><em><a href=\"https:\/\/www.hult.edu\/en\/about-us\/faculty\/hossein-khatami\/\" target=\"_blank\" rel=\"noopener\">Hossein Khatami<\/a>\u00a0has been a Professor of Finance at Hult since September 2013. Hossein worked as an investment consultant and financial analyst before doing his Masters at Cass Business School. He completed his PhD at Manchester Business School in a research network with partners including McKinsey &amp; Co., Credit Suisse, MSCI, and KPMG, among others . He then went back to his home country of Iran to enjoy one of the most educational experiences of his life: establishing an asset management and investment banking division for a leading bank in the region. He was involved all aspects of the business from product design and development to trading and portfolio management, from sales and negotiations to people management and strategic planning, and the division grew fast to become a major contributor to the bank&#8217;s profitability. He has also established and now manages two companies with primary focus on asset management and business consulting.<\/em><\/p>\n<p>Accelerate your financial career and boost your earning potential with a <a href=\"https:\/\/www.hult.edu\/en\/programs\/masters\/finance\/\">Masters in Finance<\/a> from Hult. To learn more, take a look at our blog <a href=\"https:\/\/www.hult.edu\/blog\/what-can-you-do-master-degree-in-finance\/\">What can you do with a Master degree in Finance?<\/a> or get into wider business with a <a href=\"https:\/\/www.hult.edu\/en\/programs\/masters\/international-business\/\">Masters in International Business<\/a> instead. Download a brochure or get in touch today to find out how Hult can help you to explore everything about the business world, the future, and yourself.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In their paper &#8220;Rating Friends: The Effect of Personal Connections on Credit Ratings&#8221; \u00a0Hossein Khatami, professor of finance at Hult,\u00a0Maria-Teresa Marchica, and Roberto Mura, investigate the impartiality and independence of&#8230;<\/p>\n","protected":false},"author":4,"featured_media":6639,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[114],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v18.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Rating Friends: The Effect of Personal Connections on Credit Ratings | Hult International Business School<\/title>\n<meta name=\"description\" content=\"Hossein Khatami, professor of finance at Hult,\u00a0and his 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