| Abstract | As thousands of firm bonds in China have been issued since 2007, firm bonds play an important role for directing finance as well as the substantial economy. However, the huge amount and fast growth of bonds have brought government consideration for national system financial risk. Moreover, credit rating attracts the attention of capital market and researchers. Former articles showed the signal function of credit rating in reducing the asymmetric information in the bond issuing process, in which issuers can attain the properly bond cost. Besides, the business model of issuer payment in credit rating is always doubtful, even for Standard Poor, Moody and Fitch, especially after the Subprime Crisis breaking out in 2008. But the study for rating shopping behavior is very limited yet. Prior literature was based on mathematic derivation, with empirical evidence only in CMBS and CDOs. This paper is targeting for rating shopping behavior based on Chinese bond market.
Compared with the well-developed bond market in the US, Chinese capital market provides special background for credit rating and bond issuing study. On the other hand, there exist many rating agencies, without any industry leader and new competitors are still breaking the entry barriers. It is hard for rating agency to keep the balance of fair reputation of independence and income coming from the negotiation with the issuers. On the other hand, the government acted as the final underwriter in bond payments in the past, where all the participants during the bond issuing process believed an unwritten law, bonds were never violated. While this unwritten law for violation promoted bonds issuing in a short time, it cause the disorder and accumulation for the potential risk. All above indicates lower quality for Chinese credit rating, where rating shopping behavior may be more active.
This paper studies rating shopping behavior on enterprise bond market by concentrating on the influence of firm credit rating on bond issuing decisions, using Chinese enterprise bond issuing and credit rating sample from 2007 to 2017. Firms are more likely to get credit rating upgraded in the year prior to issuing bond, where the results persist after shock study of investor payment rating agency participating, and instrumental variable estimation using mean bond issuing probability in industrial/province level and the underwriting in the issuing process as IVs. For more detail, firstly, firms with ratings beneath the restricting investing level of insurance company are more motivated to get ratings upgraded. Secondly, firms with more financing demand are more likely to get ratings upgraded. Thirdly, firms are more likely to get ratings upgraded when their rating agency lost market share. Fourthly, firms can get ratings upgraded by changing the rating agency. Furthermore, we study the economic results and find that credit rating upgrades can reduce the issuing cost and yield of issued bond. Besides, the rating shopping behavior can be identified completely in the exchange market while only partly in the issuing market.
This paper contributes in three aspects. Firstly, this paper contributes for the rating shopping behavior and issuer payment business model, where former literature only made conclusions within the mathematic derivation. Secondly, this paper contributes for pricing efficiency in aspect of bond market while former literature concentrated on the stock market. Thirdly, this paper contributes for the developing country study which provides directions for the theory as well as the practice for developing countries.
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