Competition, Rating Shopping and Yield Spread: Evidence from Chinese Enterprise Bond Market

Abstract

Booming markets are a time of high returns and high risk, including the risk of misrepresenting the quality of an investment. The Chinese bond market has recently been going through a boom period, and we document evidence of ratings shopping in the enterprise bond market. Our evidence shows that some firms get higher credit ratings than they should, resulting in a lower cost of debt financing. We also find that investors become aware of this after multiple financing rounds and punish all clients of the ratings inflators, resulting in a lemons market in bonds for certain firms.

Keywords: sample selection; rating shopping; relative yield spread; market share

JEL Classification: D43; G24; L14; L15