Does Reputational Capital Affect Credit Rating Agencies?: Empirical Evidence from a Natural Experiment in China

36 Pages Posted: 4 Apr 2019 Last revised: 1 Sep 2019

See all articles by Wenming Xu

Wenming Xu

School of Law and Economics, China University of Political Science and Law

Yan Liu

Tilburg University - TIAS School for Business and Society

Date Written: March 4, 2019

Abstract

The subprime mortgage crisis of 2007-2008 has led major economies to reform their credit rating regulations, and China is not an exception. This paper employs a difference-in-difference research design to investigate whether reputational capital affects credit rating agencies. The first market-oriented evaluation of the Chinese inter-bank bond market is chosen as the source of the exogenous reputational shock. Using the medium term notes rated by China Chengxin International Credit Rating as benchmarks, we identify a causal relationship revealing that the average yield spread at the issuance of medium term notes, as rated by China Lianhe Credit Rating, increases by between 0.22% and 0.33% percent due to its decreased reputational capital. Our research provides favorable evidence for the recent reform measures that aim to increase the disciplinary power of reputational capital.

Keywords: Chinese Debt Market; Credit Rating Agencies; Difference-in-Difference; Inter-bank Bond Market; Medium Term Note; Reputational Capital

JEL Classification: G01; G14; G24; G28

Suggested Citation

Xu, Wenming and Liu, Yan, Does Reputational Capital Affect Credit Rating Agencies?: Empirical Evidence from a Natural Experiment in China (March 4, 2019). Available at SSRN: https://ssrn.com/abstract=3346486 or http://dx.doi.org/10.2139/ssrn.3346486

Wenming Xu (Contact Author)

School of Law and Economics, China University of Political Science and Law ( email )

25 Xitucheng Rd
Haidian District
Beijing
China

Yan Liu

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

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