Information quality of credit ratings and the role of credit rating agencies: the impact of rating agency reform in China

摘要

The rating quality of credit rating agencies (CRAs) attracted substantial attention from researchers after the global financial crisis. In particular, the potential conflicts of interest of CRAs have been widely criticised. Investors expect CRAs to provide accurate and timely ratings as an evaluation benchmark. However, CRAs collect most of their revenue from bond issuers; thus, they have an incentive to cater to issuers, resulting in inflated and non-informative ratings. This study examines how incumbent issuer-pay CRAs in China changed their ratings strategy in response to a reform in the credit rating industry. This reform introduces a new independent rating agency, China Credit Rating (CCR), which utilised a combination of public utility and investor-pay business models. CCR receives great support from the government which prevent it from the pressure given by issuers and investors. Meanwhile, CCR collects part of its revenue from subscribers, reducing the possibility of government budget shortage. As a result, CCR tends to play a role in disciplining incumbent issuer-pay CRAs’ rating behaviour and further improving ratings’ information quality. By investigating how incumbent issuer-pay CRAs in China respond to the entry of CCR, this thesis finds that the rating inflation for firms that are also covered by CCR are significantly lower than those not covered by CCR. Moreover, market reaction to rating changes by CRAs on firms covered by CCR is more pronounced after CCR’s rating coverage initiation. These results indicate that ratings information quality from CRAs has been improved in the sense that rating inflation is attenuated and ratings are associated with larger market reaction when CCR is present. This result adds empirical evidence to the literature documenting the influence of the introduction of a new rating agency with an alternative business model to issuer-pay rating agencies. This research further shows that the scope of information quality improvement is associated with different information scenarios and the reputation of the rating assigners. Specifically, the information quality improvements are more pronounced for firms facing better investor protection environment (e.g. advanced marketization or better legal rights protection) and for ratings from more reputable CRAs. These results suggest that both internal (i.e. CRAs’ reputation) and external forces (i.e. investor protection environment) are crucial to attain higher informativeness for CRAs’ ratings with the presence of CCR. In addition, this study provides primary evidence that certification via reputable CRAs is beneficial to issuers in the bond market in China, with regard to save financing cost. After considering the issuer-reputable CRA match, this thesis finds bonds rated by the most reputable CRAs to be associated with a lower yield spread (higher bond price), revealing the investors’ recognition of the rating quality of reputable CRAs. This result is consistent with the traditional certification hypothesis and underlying reputational mechanism. This research further finds such benefits are larger for firms with worse investor protection environment or with higher risks. On the other hand, yield premium is significantly lower in the post-CCR period and for firms not covered by CCR. These results illustrate that reputable CRAs play a role of certifying the quality of firms’ debt securities, and this certification effect is reinforced by the entry of CCR. Overall, this study contributes to a growing body of literature that examines how different business models of CRA affect credit ratings by studying the efficiency of an innovative trial in China, making a supplement to the relevant theoretical models, empirical studies and government proposals. It also complements the study on reputational mechanism of credit rating agencies, calls for investors’ attention on the different reactions of different issuer-pay CRAs, and emphasizes the importance of investor protection environment construction. This study also supplements the research on certification role of credit rating agencies, and provides a sight for bond issuers and investors when evaluating bonds rated by CRAs with different reputation.