We show that banks manipulate borrowers' credit ratings before sharing them with competing banks. Using a unique feature on the timing of information disclosure of a public credit registry, we disentangle the effect of manipulation from learning of credit ratings. We show that banks downgrade high-quality borrowers for which they have positive private information to protect their informational rents. Banks also upgrade low-quality borrowers with multiple lenders toavoid creditor runs. Our results suggest that credit ratings manipulation limits the positive effects of credit registries' information disclosure on credit allocation.
ASJC Scopus subject areas
- Economics and Econometrics