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The Impact of Neutral Rating Agency on Issuerpaid Credit Rating System

【Authors】
MENG Qingbin, ZHANG Qiang, WU Weixing & WANG Yuxi
【WorkUnit】
MENG Qingbin (Renmin University of China, 100872)
ZHANG Qiang (Renmin University of China, 100872)
WU Weixing (University of International Business and Economics, 100029)
WANG Yuxi (Renmin University of China, 100872)
【Abstract】

Employing China's first neutral credit rating agency—China Bond Rating Co', Ltd.(CBRC) as the research background, this paper analyzes the reaction of existing issuer-paid credit rating agencies and the bond market towards CBRC's new neutral rating. We mainly find that companies with lower ratings by CBRC issue bonds in higher interests in the bond issuance market. These results also exist in the bond trading market, where bond's yield to maturity rises up after CBRC's lower rating in both short and long terms. We further show that after the entrance of CBRC, existing issuer-paid credit rating agencies will downgrade their ratings and this adjustment is more obvious in industries with higher CBRC occupation, which, in fact, has weakened irrational high rating condition. Possible explanation for adjustment of issuer-paid credit rating is the reputation mechanism rather than the study mechanism.


JEL:G14, G24, G33

【KeyWords】
Corporate Credit Bond, Neutral Credit Rating Agencies, Issuer-paid Credit Rating Agencies, Irrational High Rating, Reputation Mechanism