Xiaolu Hu, Haozhi Huang, Zheyao Pan, Jing Shi
In: Journal of Banking and Finance, 2019, Vol. 106
Hu et al. 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. They 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. Their paper provides new information and insight into the debate of whether CRAs with alternative business models can alleviate the information asymmetry problem.