Information Asymmetry and Credit Rating: A Quasi-Natural Experiment from China

1 Pages Posted: 28 Sep 2017 Last revised: 17 Mar 2020

See all articles by Xiaolu Hu

Xiaolu Hu

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing

Haozhi (Rachel) Huang

Macquarie University

Zheyao Pan

Macquarie University

Jing Shi

Macquarie University

Date Written: March 16, 2020

Abstract

This paper examines how the incumbent issuer-pay credit rating agencies (CRAs) in China adjust their rating strategies as a response to the entry of an independent rating agency, China Bond Rating (CBR), which utilizes a combination of public utility and investor-pay business model. We find that the CBR’s rating coverage has effectively reduced the information asymmetry in the Chinese corporate bond market. This is evident by decreased rating inflation and increased informativeness of rating change announcements of incumbent issuer-pay CRAs. It appeared that the reputation concern is an important channel driving incumbent CRA’s strategic rating reactions. Our paper sheds new light on the debate concerning whether CRAs with alternative business models can alleviate the information asymmetry problem.

Keywords: Credit ratings; Information asymmetry; Rating quality; Investor-pay model; Public utility model

JEL Classification: G12; G14; G24; G28

Suggested Citation

Hu, Xiaolu and Huang, Haozhi and Pan, Zheyao and Shi, Jing, Information Asymmetry and Credit Rating: A Quasi-Natural Experiment from China (March 16, 2020). Asian Finance Association (AsianFA) 2018 Conference, Journal of Banking and Finance, Vol. 106, 2019, Available at SSRN: https://ssrn.com/abstract=3042425 or http://dx.doi.org/10.2139/ssrn.3042425

Xiaolu Hu (Contact Author)

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Haozhi Huang

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Zheyao Pan

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Jing Shi

Macquarie University ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/jing-shi

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