¹Queen's School of Business, Queen's University, Kingston, Ontario, Canada

Correspondence: LD Purda, Queen's School of Business, Queen's University, Kingston, Ontario, Canada K7L 3N6. Tel: +1 613 533 6980; Fax: +1 613 533 2321; E-mail: lpurda@business.queensu.ca

Received 15 June 2005; Revised 30 October 2007; Accepted 18 December 2007; Published online 19 June 2008.

Abstract

I examine how a country's financial system influences assessments of firm-level risk. Consistent with theories of financial intermediation, I find that firms located in a country with a bank-oriented financial system are perceived as posing a lower credit risk and correspondingly are assigned higher credit ratings than otherwise similar firms in a market-oriented setting. Even after considering elements of a country's legal infrastructure that relate to creditor protection and insolvency proceedings, the financial system remains an important determinant of credit-rating assignment. The results are robust to the inclusion of several firm-level controls, including financial performance, industry, ownership concentration, political connections, and the ease with which the firm's assets can be monitored.