The Impact Of Pay Model On Rating Quality

Bond defaults have occurred frequently since 2014.Even highest rated companies have defaulted,exposing the problems of rating quality.The pay model of rating is one of the most important factors affecting rating quality.Domestic rating agencies adopted the issuer-pay model in the early stage,which may induce issuers to deliver benefits to rating agencies and result in rating shopping,sales bundling and other problems;In order to reduce the negative impact of the issuer-pay model,China has established the "China Bond Rating Co.,Ltd." to carry out the investor-pay model,but it’s not perfect,too.It has free rider problem and is more difficult to obtain private information from issuers.Therefore,this paper studies the impact of pay model of rating agencies on rating quality,and tries to provide reference for improving rating quality in China from the perspective of pay model.Firstly,this paper reviews the domestic and foreign literature and explains pay model and rating quality theoretically.Then,through the theoretical analysis,OLS regression,Ordered Logit model and Vuong test,this paper makes an empirical analysis on the bond samples publicly issued from 2017 to 2020 with two kinds of ratings.The conclusions are as follows: 1)The pay model has significant impact on the accuracy of rating quality.The investor-pay rating can better predict the bond default risk,while the issuer-pay rating can’t distinguish the default risk;2)The pay model has no impact on the effectiveness of rating quality.Both investor-pay rating and issuer-pay rating can affect credit spreads significantly.According to the conclusions and the problems existing in domestic rating agencies,this paper provides targeted suggestions.This paper puts forward three evaluation standards of rating quality.Beside the perspective of bond spread,the implicit default probability index is introduced to measure the bond default risk,so the conclusions about rating quality is more comprehensive.By comparing two kinds of pay model of rating agencies directly,this paper enriches the relevant literature.