Inflated credit ratings temporarily reduce the cost of debt and mitigate the impact of the tax avoidance risk premium. Consistent with this, we show that rating inflation is positively related to future tax avoidance, particularly for firms with less intense debtholder monitoring. The relation...

Does credit rating quality affect corporate innovation? Using exogenous variation in rating quality that arises from competition among rating agencies, we show that firms with inflated ratings issue more patents, but their patent quality, as measured by scientific and economic value, declines....