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

Xiaolu Hu, Haozhi Huang, Zheyao Pan and Jing Shi

Journal of Banking & Finance, 2019, vol. 106, issue C, 132-152

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 (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 G28 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:106:y:2019:i:c:p:132-152

DOI: 10.1016/j.jbankfin.2019.06.003

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