From Rating Consumers to Rating Influencers: The Investor's Role in Corporate Loan Ratings
Publication Date
8-12-2026
Abstract
Credit ratings not only inform investors about default risk, but also serve as verifiable quality signals in asset management contracts, giving institutional investors a stake in the ratings. We show that when this stake is high, investors may influence rating outcomes to favor their portfolio positions and managerial compensation. Using a proprietary dataset of Collateralized Loan Obligations (CLOs), we examine the incentives of CLO managers to resist rating downgrades that could trigger overcollateralization test failures, which would reduce the managers' own payoffs. We find, and confirm using a novel instrumental variable, that loans facing greater resistance from CLO managers exhibit a significantly lower likelihood of downgrades in the near term. This effect is more pronounced when managers are above their incentive fee hurdles and when deteriorating loans are harder to liquidate preemptively. The delayed downgrades materialize as multi-notch downgrades within two to three years. Our results demonstrate that beyond fixed-income issuers, investors-typically viewed as rating consumerscan exert strategic influence on rating agencies.
Document Type
Article
Keywords
Credit ratings, Corporate loans, CLOs, Investor influence, Strategic trading
Disciplines
Finance
Language
English
