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

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  • Hu, Xiaolu
  • Huang, Haozhi
  • Pan, Zheyao
  • Shi, Jing

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.

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  • Hu, Xiaolu & Huang, Haozhi & Pan, Zheyao & Shi, Jing, 2019. "Information asymmetry and credit rating: A quasi-natural experiment from China," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 132-152.
    • Handle: RePEc:eee:jbfina:v:106:y:2019:i:c:p:132-152
    DOI: 10.1016/j.jbankfin.2019.06.003
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    2. Hu, Xiaolu & Shi, Jing & Wang, Lafang & Yu, Jing, 2020. "Foreign ownership in Chinese credit ratings industry: Information revelation or certification?," Journal of Banking & Finance, Elsevier, vol. 118(C).
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    8. Liu, Yan, 2023. "Essays on credit rating agencies in China," Other publications TiSEM b54b3315-1185-48b8-aaf8-8, Tilburg University, School of Economics and Management.
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    More about this item

    Keywords

    Credit ratings; Information asymmetry; Ratings quality; Investor-paid model; Public utility model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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