Research On Credit Rating Agencies In China

Credit rating agencies is an important financial intermediary in the capital market.Because of poor performance in the subprime crisis and the European debt crisis,S&P,Moody's and Fitch ratings received criticism from all over the world.Regulators and academics criticism focus on the monopoly industry structure,and suggest to promote competition in rating industry.At the same time,Chinese government realize the huge risks brought by the foreign credit rating agencies,begin to cultivate local agencies in China.However,this are many problems in rating industry in our country,such as,the rating agencies have not been widely recognized,and competition is more fierce.Moreover,China's capital market is not perfect,credit risk has not released.In this context,the result of promoting competition in domestic rating industry is uncertain?In addition,the reputation capital is the core competitiveness of the rating agencies,does domestic rating agencies will restrain their actions because of fearing to lost the reputation capital?Study the above problem,which is beneficial to depict the behavior characteristics of the rating agencies of China,and also conducive to find out the problems hindering the development of the credit rating industry in our country.On the basis of theoretical research and literature analysis,this paper summed up the competition mechanism and reputation mechanism is the two big market mechanism is a major constraint mechanism of rating agencies,as a result,this article study credit rating agencies mainly from the perspective of competition and reputation.The existing literature uses market share as credit rating agencies reputation variable.But because of fierce competition and very low default rate,the motivation of increase income by granting inflated ratings will be strengthened,so the connection between market share and reputation of credit rating agencies in China may not straightforward.This paper designs a new reputation variable to represent the reputation of the rating agencies in China.Using new design variables,this paper analyzes the behavior characteristics of domestic credit rating agencies.Then,this paper analyzes the asymmetric effects of competition mechanism and reputation mechanism on credit rating.Specifically,the arrangement of this paper as follows:The first part is introduction,introduces the research background,research significance,research methods,innovation points and shortcomings.The second part is related theories and literature review,this part introduces the gatekeeper mechanism which support the existence of credit rating agencies,summarizes the principal-agent theory,paper introduces the theory of state intervention,and comb the literature about the effectiveness of our country's credit rating and the influence factors of credit rating,factors influencing the credit rating of the literature,and comb the literature on the constrain power of competition mechanism and reputation mechanism.The third part is the comparison of Chinese and foreign rating agencies,from the industry competition and reputation capital angle,this part compare the domestic credit rating agencies and the three major rating agencies,found that domestic rating agencies reputation capital is relatively low,and domestic credit rating industry has more intense competition.By using the data of China's corporate bonds and enterprise bonds,the fourth part analyzes the behavior characteristics of domestic rating agencies facing fierce competition and potential loss of reputation capital.Before the empirical analysis,this chapter analyzes the reputation variables of the rating agencies used in the existing research,and designs a new reputation variable.The sixth part is experience reference.This part introduces the experience of foreign regulatory authorities on independence,disclosure and civil liability of credit rating agencies,and introduces the influence of rating-dependent regulations on competition mechanism and reputation mechanism.At last,this part discusses the business models of credit rating agency which are widely concerned.The seventh part introduces the conclusions,policy recommendations and research prospects.Based on the analysis above,this part put forward eight policy recommendations:releasing credit risk orderly,strengthen the independence,civil liability,information disclosure,and so on.At the end of this paper,the possible research of future is introduced.The main conclusions of this paper are as follows:First,the market share of credit rating agencies in China can not reflect reputation level effectively,the behavior of upgrade rating issuer rating before bond issue reflect reputation level of credit rating agencies in China precisely.In empirical study,market share has significant positive correlation with bond spread,high market share don't bring low bond spread,indicating that investors don't give higher degree of recognition on credit rating agency which have higher market share.The analysis about the behavior of upgrade issuer rating before bond issue indicate that,this behavior increase bond spread,and can't be recognized by the credit rating industry,these results indicate that this behavior damage the reputation of credit rating agency.Second,under the issuer-pay model,the competition between credit rating agencies in China aggravate the conflict of interest,the credit rating agency pay more attention to short-term benefits,so that the rating quality will be reduced.The competition of credit rating industry in China is more fierce than the US,but it increase bond spread,this indicate that investors believe competition in domestic rating industry prompting the credit rating agency cater interests of issuers,so that investors demand a higher risk premium.These results indicate that,in China,the competition mechanism can't constrain the behavior of credit rating agencies,and it may bring negative influence.Third,the reputation mechanism has the function of restrain rating inflation.The main business of domestic rating agencies is the rating business of standardized products,the degree of information asymmetry of such products is relatively lower than structure finance products,and the relevant information is easy to obtain,main investors are institutional investors.So that,although the credit risk can't be effective released,but investors have a certain ability of risk judgement,and this ability will ensure the constrain ability of reputation mechanism.Fourth,competition mechanism and reputation mechanism have asymmetric effect on bond rating.Competition has asymmetric effect on issuer rating and issue rating,competition has negative effect on issuer rating,leads rating inflation,but don't have significant influence on issue rating.Reputation mechanism has asymmetric influence on issuer rating and issue rating,it has regular ability on issue rating,but don't have significant influence on issuer rating.Because of rigid payment reduces the ability of revealing risk,investors mainly depend on issuer rating to reveal risk.So that,domestic credit rating agencies increase income by upgrading issuer rating,and maintain reputation capital by downgrading issue rating.The main innovation of this paper:First,this paper designed a new reputation variable.This paper designed a new reputation variable by using the information of rating change before bond issue,and get robust resultsSecond,this paper discovered and confirmed the asymmetric influence of competition mechanism and reputation mechanism on bond rating.There is asymmetric feature in domestic issuer rating and issue rating,but literatures haven't pay attention to this problem,which may be due to the special environment in China.However,the analysis of this special problem can reveal the behavior characteristics of domestic rating agency effectively,and it may helpful to find out the problem exiting in domestic rating industry.Third,this paper analyze the business model of credit rating agency,and domestic discussion mainly focus on issuer-pay model and investor-pay model,and domestic literature believe that investor-pay model is better than issuer-pay model.This paper analyze five business model of credit rating agency which include investor-pay model and issuer-pay model,and point out advantages and disadvantages of each business model.This paper argues that investor-pay model maybe not better than issuer-pay model,the coexistence and effective competition of various business models is better than a signal business model.