HARDENING SOFT INFORMATION IN CREDIT RATING: THE ROLE OF NATIONAL CULTURE

Abstract

Credit ratings play a central role in disseminating credit information to market participants and in shaping a firm's financing and capital structure. However, recent evidence suggests that global rating standards change over time and a firm that maintains the same fundamentals over time may receive different ratings, suggesting that soft information plays a role in credit ratings. This study provides one of the first pieces of evidence on the determinants of soft information in credit ratings. Using Hofstede’s four cultural dimensions (uncertainty avoidance, collectivism, power distance, and masculinity) as proxies for culture, we show that soft information in credit ratings is positively (negatively) associated with uncertainty avoidance (power distance). This new evidence is discernible primarily in developed countries. Taken together, our evidence indicates that credit ratings in countries with increased levels of uncertainty avoidance (and power distance) are more (less) likely to incorporate soft information.