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Does Market Competition Reduce the Rating Quality?——Empirical Study on the New Entrant to the Rating Industry

【Authors】
XU Xiaoping, RUAN Yongfeng & LIU Yinlu
【WorkUnit】
Shanghai University of Finance and Economics, 200433.
【Abstract】

The credit rating system is part of the most important infrastructure for the sound long-term development of the bond market, and for maintaining the stability of the financial system. In view of the entry of Pengyuan Credit Rating Co., Ltd. into the enterprise bond market, this paper studies the impact of market competition on the rating quality by using the data of the enterprise bond market between 2005 and 2011. The results show that market competition could lead to rating inflation and hence, and weaken the role of credit rating in reducing credit spreads, that is, market competition might reduce rating quality. From the perspectives of interest motivation and reputation motivation, the paper finds that different rating agencies have heterogeneous reactions to the increased market competition, but investors could not fully identify these reactions in the short run. This research has important implications on how to overcome the negative effect of enhanced competition and strengthen the risk disclosure function of the credit rating.

JEL:G24, L14, L15

【KeyWords】
Credit Rating, Rating Market Competition, Rating Quality, Interest Motivation, Reputation Motivation