Does reputational capital affect credit rating agencies?: empirical evidence from a natural experiment in China

Wenming Xu () and Yan Liu
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Wenming Xu: School of Law and Economics and Qian Duansheng Junior Faculty At China University of Political Science and Law
Yan Liu: Tilburg University

European Journal of Law and Economics, 2021, vol. 51, issue 3, No 2, 433-468

Abstract: Abstract The subprime mortgage crisis of 2007–2008 has led major economies to reform their credit rating regulations, and China is not an exception. This paper employs a difference-in-difference research design to investigate whether the reputational capital of credit rating agencies affects their rated bonds. The first market-oriented evaluation of the Chinese inter-bank bond market is chosen as the source of the exogenous reputational shock. Using the medium term notes rated by China Chengxin International Credit Rating as benchmarks, a causal relationship is identified revealing that the average yield spread at the issuance of medium term notes, as rated by China Lianhe Credit Rating, increases by between 0.23 and 0.33% due to its decreased reputational capital. This research provides favorable evidence for the recent reform measures that aim to increase the disciplinary power of reputational capital.

Keywords: Chinese debt market; Credit rating agencies; Difference-in-difference; Inter-bank bond market; Medium term notes; Reputational capital (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10657-021-09697-3

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