Boosted Credit Ratings in China: The Effects of Credit Enhancement on Bond Pricing

69 Pages Posted: 1 Apr 2020 Last revised: 26 Oct 2020

See all articles by Haoyu Gao

Haoyu Gao

Renmin University of China

Yuting Huang

Capital University of Economics and Business

Jingyuan Mo

New York University

Date Written: October 25, 2020

Abstract

More than 25% of credit bonds in China received improved issuance ratings, among which 96.6% used credit enhancement. We find that credit enhancement can effectively lower credit spreads, which still holds after a battery of robustness tests. We employ the propensity score matching method, the instrumental variable approach, and firm–year fixed effects to address endogeneity. The risk reduction and loss sharing mechanisms are identified empirically; the information production and liquidity improvement channels are excluded. Our results suggest that credit enhancement usage provides a market solution for low-rated firms to issue high-rated bonds and lower the cost of debt financing.

Keywords: credit enhancement, financing costs, credit bonds, China

JEL Classification: G10, G12, G15, G19

Suggested Citation

Gao, Haoyu and Huang, Yuting and Mo, Jingyuan, Boosted Credit Ratings in China: The Effects of Credit Enhancement on Bond Pricing (October 25, 2020). Available at SSRN: https://ssrn.com/abstract=3549270 or http://dx.doi.org/10.2139/ssrn.3549270

Haoyu Gao

Renmin University of China ( email )

Mingde main building
Haidian district, No. 59,
Beijing, Beijing 100872
China

Yuting Huang

Capital University of Economics and Business ( email )

Beijing
China

Jingyuan Mo (Contact Author)

New York University ( email )

44 West 4th Street
Finance Department
New York, NY NY 10012
United States
212-998-0365 (Phone)

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