The Evolution of Bond Credit Rating Quality under the Issuer-pay Revenue Model:2008-2018

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Journal of Central University of Finance & Economics ›› 2021, Vol. 0 ›› Issue (3) : 37-57.

SHI Xian-wang, LIU Qi, LI Teng

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Abstract

This paper examines the time-series changes in bond credit rating standards for companies issuing corporate bonds,enterprise bonds and medium-term notes in China from 2008 to 2018,in order to study the evolution of bond credit rating quality in China.The study finds that China's bond credit rating standards have been loosening year by year.Moreover,the above phenomenon exists only among the issuer-pay rating agencies.The loosening of rating standards is more obvious when the competition in the rating market is more fierce,when the issuer gets a rating for the first time,or when the rating agency enters a certain region for the first year.The relaxation of rating standards is also more pronounced for private enterprises than for state-owned enterprises.Further analysis reveals that bond investors identified lower rating standards from rating agencies and demanded higher risk premiums.At the same time,the alternative explanation that the relaxation of rating standards by rating agencies is due to better credit qualifications of issuers is ruled out.This study shows that the conflicts of interest between rating agencies and issuers under the issuer-pay revenue model are the fundamental premise leading to the relaxation of China's credit rating standards,and that financial disintermediation has intensified the business competition among rating companies,thus further promoting the relaxation of rating standards.

Key words

Relaxation of rating standard / Rating inflation / Conflict of interest / Financial disintermediation / Competition

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SHI Xian-wang, LIU Qi, LI Teng. The Evolution of Bond Credit Rating Quality under the Issuer-pay Revenue Model:2008-2018[J]. Journal of Central University of Finance & Economics, 2021, 0(3): 37-57

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