An Empirical Analysis Of The Correlation Between Corporate Credit Rating And Economic Fluctuation

As the fast development of China’s bond market in recent years, credit rating agencies’business volume has been increased, their rating methodology and rating indicator system has been built, and their importance in China’s financial market, China’s society and international society has been improved gradually. After years of development, credit rating agencies have obtained a lot of credit rating data, which has made it is possible for researches in the related subjects.In the process of credit rating agency’s corporate credit rating assignment, a multiple of factors should be considered, such as regional economic development level and financial strength, industry characristics, share holders’ background, current operating situation, and some of the factors above will be influenced by the macroeconomic situation in some degree. Because of the fluctuation of China’s macroeconomic growth rate in recent years, company’s operating situation must be influenced by macro economy, industry cycle, and financial market fluctuation. Therefore, a question of whether credit rating agency’s corporate credit rating assignments have been moved in a similar way is worth to investigate. Numbers of rating adjustments in recent years combined with credit events happened during the last two years have made institutional investors, such as commercial banks and insurance companies paid more attention to rating adjustments, therefore, the investigation of this question still has some meaning in reality.To analysis the correlation between corporate credit rating and economic fluctuation, this paper has reviewed related literatures on subjects of business cycle theories, the procyclicality of financial system, the correlation between company’s operating outcome and economic fluctuation, and the correlation between corporate credit rating and economic fluctuation. In the subject of business cycle theories, this paper has simply reviewed main theories. In the subject of the procyclicality of financial system, almost all of the literatures concluded that the financial system is procyclical, and most of those conclusions are based on the loan market, only a few of them are based on other areas. In consider of the similarity between loan market and bond market, this paper assumed that China’s financial system which includes both loan market and bond market is procyclical. In the subject of the correlation between company’s operating outcome and economic fluctuation, most of related literatures have found that there is a statistically significant positive correlation between company’s operating outcome and economic fluctuation. In the subject of the correlation between corporate credit rating and economic fluctuation, foreign country’s researches have been started many years before because of the early development of theirs bond market and credit rating industry. Some of them concluded that the adjustments of corporate credit rating have a trend, the changing rating standards maybe the possible reason. Some other researches have found a different conclusion. China’s corporate credit rating industry has been expanded in recent years, and topics about China’s corporate credit rating are still limited, only a few literatures investigate the topic under discussion, either theoretically or empirically.This paper has introduced corporate credit rating from four aspects, which includes basic characteristics of corporate credit rating (i.e. its concepts, characteristics, categories and function), international and domestic credit rating agencies, China’s corporate credit rating market, and the general principle of corporate credit rating. The introduction of those aspects may help to improve the understanding of the basic characteristics of corporate credit rating, credit rating agencies who rate them, the current situation of China’s corporate credit rating market, and the principles which credit rating agencies are based on. The introduction may also help to improve the understanding of how this paper dealing with sample data, choosing empirical model, selecting explainable variables, and analyzing regression results.Sample data used in this paper includes corporate credit rating data, financial indicator, operating risk indicator and economic fluctuation indicator. Corporate credit rating data are assigned by important domestic credit rating agencies, thus data represents China’s corporate credit rating market well. After considering the research methods of current literatures and corporate credit rating market’s current situation, this paper has made the sample sampling criterion, and statistically analyzed the descriptive statistics of sample data. The empirical model chosen by this paper is the ordered probit model, which is suitable for the statistical analysis of credit rating data, and also used widely among related literatures.After empirically analyzed the sample data, this paper has found that the correlation between corporate credit rating and economic fluctuation are different among credit rating agencies. Among those credit rating agencies, the correlation between corporate credit rating and economic fluctuation is positive and statistically significant for Zhongchengxin, the changing of corporate credit rating has a statistically significant linear trend for Dagong and Pengyuan, both positive and statistically significant correlation between corporate credit rating and economic fluctuation and statistically significant linear trend may exist for Lianhe, and none of a positive statistically significant correlation between corporate credit rating and economic fluctuation or a statistically significant linear trend of the changing of corporate credit rating exists for Xinshiji. For the findings above, this paper has tested the robustness of them by using different regression model settings, different sub-samples, and different economic fluctuation indicators. For outliers exist in the sample data of some financial explainable variables, this paper has also explained the source of outliers, how to trim outliers, and the effects of them on regression results. Furthermore, the regression results have indicated that some financial explainable variables are statistically significant, and the signs of their coefficients are negative. In corporate credit rating practice, the negative signs of those variables may not reasonable for all, thus, this paper has explained the reason behind.Finally, based on all of the regression results, this paper has concluded and explained important findings and their meanings for corporate credit rating practice, and has pointed out deficiencies of this paper and directions for further search.