Information asymmetry and credit rating: A quasi-natural experiment from China

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We examine how the issuer-paid incumbent credit rating agencies (CRAs) in China adjust their rating strategies in response to the 2010 entry of an independent credit rating agency, China Bond Rating (CBR) between 2006 and 2015. The business model that CBR employs is a combination of the public utility model and the investor-paid model. We find that the CBR's ratings coverage effectively reduced the information asymmetry in the Chinese corporate bond market. The evidence shows decreased ratings inflation and increased informativeness of rating change announcements by incumbent issuer-paid CRAs after CBR entered the market. The findings suggest that a firm's credibility is an important channel driving issuer-paid incumbent CRAs’ strategic ratings. Our paper provides new information and insight into the debate of whether CRAs with alternative business models can alleviate the information asymmetry problem.
LanguageEnglish
Pages132-152
Number of pages21
JournalJournal of Banking and Finance
Volume106
Early online date11 Jun 2019
DOIs
Publication statusPublished - Sep 2019

Fingerprint

Natural experiment
Information asymmetry
Credit rating agencies
Rating
China
Credit rating
Incumbents
Bond ratings
Business model
Announcement
Bond market
Corporate bonds
Public utilities
Credibility
Informativeness
Investors
Inflation

Keywords

  • Credit ratings
  • Information asymmetry
  • Ratings quality
  • Investor-paid model
  • Public utility model

Cite this

@article{1fa59adabda94665b31a68017b2c5a2f,
title = "Information asymmetry and credit rating: A quasi-natural experiment from China",
abstract = "We examine how the issuer-paid incumbent credit rating agencies (CRAs) in China adjust their rating strategies in response to the 2010 entry of an independent credit rating agency, China Bond Rating (CBR) between 2006 and 2015. The business model that CBR employs is a combination of the public utility model and the investor-paid model. We find that the CBR's ratings coverage effectively reduced the information asymmetry in the Chinese corporate bond market. The evidence shows decreased ratings inflation and increased informativeness of rating change announcements by incumbent issuer-paid CRAs after CBR entered the market. The findings suggest that a firm's credibility is an important channel driving issuer-paid incumbent CRAs’ strategic ratings. Our paper provides new information and insight into the debate of whether CRAs with alternative business models can alleviate the information asymmetry problem.",
keywords = "Credit ratings, Information asymmetry, Ratings quality, Investor-paid model, Public utility model",
author = "Xiaolu Hu and Haozhi Huang and Zheyao Pan and Jing Shi",
year = "2019",
month = "9",
doi = "10.1016/j.jbankfin.2019.06.003",
language = "English",
volume = "106",
pages = "132--152",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier",

}

Information asymmetry and credit rating : A quasi-natural experiment from China. / Hu, Xiaolu; Huang, Haozhi; Pan, Zheyao; Shi, Jing.

In: Journal of Banking and Finance, Vol. 106, 09.2019, p. 132-152.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - Information asymmetry and credit rating

T2 - Journal of Banking and Finance

AU - Hu, Xiaolu

AU - Huang, Haozhi

AU - Pan, Zheyao

AU - Shi, Jing

PY - 2019/9

Y1 - 2019/9

N2 - We examine how the issuer-paid incumbent credit rating agencies (CRAs) in China adjust their rating strategies in response to the 2010 entry of an independent credit rating agency, China Bond Rating (CBR) between 2006 and 2015. The business model that CBR employs is a combination of the public utility model and the investor-paid model. We find that the CBR's ratings coverage effectively reduced the information asymmetry in the Chinese corporate bond market. The evidence shows decreased ratings inflation and increased informativeness of rating change announcements by incumbent issuer-paid CRAs after CBR entered the market. The findings suggest that a firm's credibility is an important channel driving issuer-paid incumbent CRAs’ strategic ratings. Our paper provides new information and insight into the debate of whether CRAs with alternative business models can alleviate the information asymmetry problem.

AB - We examine how the issuer-paid incumbent credit rating agencies (CRAs) in China adjust their rating strategies in response to the 2010 entry of an independent credit rating agency, China Bond Rating (CBR) between 2006 and 2015. The business model that CBR employs is a combination of the public utility model and the investor-paid model. We find that the CBR's ratings coverage effectively reduced the information asymmetry in the Chinese corporate bond market. The evidence shows decreased ratings inflation and increased informativeness of rating change announcements by incumbent issuer-paid CRAs after CBR entered the market. The findings suggest that a firm's credibility is an important channel driving issuer-paid incumbent CRAs’ strategic ratings. Our paper provides new information and insight into the debate of whether CRAs with alternative business models can alleviate the information asymmetry problem.

KW - Credit ratings

KW - Information asymmetry

KW - Ratings quality

KW - Investor-paid model

KW - Public utility model

UR - http://www.scopus.com/inward/record.url?scp=85067633228&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2019.06.003

DO - 10.1016/j.jbankfin.2019.06.003

M3 - Article

VL - 106

SP - 132

EP - 152

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

ER -