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

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.