Default-probability-implied credit ratings for Chinese firms

Xiangzhen Li, Shida Liu and Hao Wang

Journal of Empirical Finance, 2025, vol. 83, issue C

Abstract: This paper estimates real-time probabilities of default (PDs) for Chinese firms and assigns PD-implied ratings benchmarked to the historical default rates of S&P rating categories. PD-implied ratings tend to be lower and more granular than those issued by domestic credit rating agencies (DCRAs). They outperform DCRA ratings in predicting defaults and offer complementary information in credit price discovery. In terms of information content, PD-implied ratings incorporate richer and more persistent cashflow information than DCRA ratings do. Contributing factors such as implicit government guarantees and the moral hazard inherent in the issuer-pays business model play a significant role in elevating DCRA ratings, leading to greater divergence from PD-implied ratings and, consequently, differences in default prediction performance.

Keywords: PD-implied ratings; Default prediction; Domestic credit rating agencies (DCRAs); Chinese bond market; Issuer-pays model (search for similar items in EconPapers)
JEL-codes: G21 G24 G28 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539825000660
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:empfin:v:83:y:2025:i:c:s0927539825000660

DOI: 10.1016/j.jempfin.2025.101644

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().