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Online Reputation and Debt Capacity

Published online by Cambridge University Press:  14 March 2023

François Derrien ,
Alexandre Garel ,
Arthur Romec  and
Jean-Philippe Weisskopf
François Derrien*
Affiliation:
HEC Paris
Alexandre Garel
Affiliation:
Audencia Business School agarel@audencia.com
Arthur Romec
Affiliation:
TBS Business School arthur.romec@gmail.com
Jean-Philippe Weisskopf
Affiliation:
EHL Hospitality Business School // HES-SO Haute École Spécialisée de Suisse Occidentale jean-philippe.weisskopf@ehl.ch
*
derrien@hec.fr (corresponding author)
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Abstract

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We explore the effects of online customer ratings on financial policy. Using a large sample of Parisian restaurants, we find a positive and economically significant relationship between customer ratings and restaurant debt. We use the locally exogenous variations in customer ratings resulting from the rounding of scores in regression discontinuity tests to establish causality. Favorable online ratings reduce cash flow risk and increase resilience to demand shocks. Consistent with the view that good online ratings increase the debt capacity of restaurants and their growth opportunities, restaurants with good ratings use their extra debt to invest in tangible assets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 3 , May 2024 , pp. 1100 - 1140
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Jarrad Harford (the editor) and an anonymous referee for their valuable comments and inputs. We are grateful to Alberta Di Giuli, Denis Gromb, Thorsten Martin, José Martin-Flores, Clemens Otto, Christophe Spaenjers, Alexander Wagner, Michael Wittry, and seminar participants at CUNEF, Toulouse Business School, Neoma Business School, the Bank of France, IIMA, the 2021 Inter-Business-School Finance Seminar, and the 2021 Corporate Finance Webinar for helpful comments and suggestions. Derrien acknowledges financial support from the Investissements d’Avenir Labex (ANR-11-IDEX-0003/Labex Ecodec/ANR-11-LABX-0047).

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