Does state ownership affect rating quality? Evidence from China's corporate bond market

Yuyue Wang, Hongyan Fang and Ronghua Luo

Economic Modelling, 2022, vol. 111, issue C

Abstract: The existing literature found that state ownership generally boosts bond ratings but ignores the implications for rating quality. Using China's corporate bonds issued from 2008 to 2018, we find that bonds issued by state-owned enterprises (SOEs) have relatively poorer rating quality than their non-SOE peers, as supported by the SOE ratings' weaker predictive power for future downward rating events. Importantly, the SOE ratings' poorer prediction performance is partly because of rating inflation; only relatively overrated SOE bonds contain less relevant information in ratings but not nonoverrated SOE bonds. This asymmetry in rating quality is prominent in the case of a local controlling government or when the SOE bonds are rated in booms wherein the incentive to inflate ratings is stronger. The evidence is consistent with a government guarantee induced rating bias where expected government guarantees reduce credit rating agencies' (CRAs') reputational costs and induce CRAs to inflate SOE ratings.

Keywords: SOE overrating; Rating quality; Government controlling ownership (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999322000876
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:111:y:2022:i:c:s0264999322000876

DOI: 10.1016/j.econmod.2022.105841

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().