The Politicization of Credit Ratings Agencies: Evidence from China

Abstract

There is much controversy around the reliability of Credit ratings agencies (CRAs). We explore how they reflect political dynamics and what this means for Chinese firms; it examines the relationship between political connections and seasoned equity offering (SEO) underpricing and how CRAs mediate this association. In China, political ties are highly visible and vested with particular importance, yet the causal processes may play out in a wider setting. Ratings alleviate information asymmetries that may deter potential investors, in turn impacting how SEOs work out. In deepening understanding of theorizing causal channels, we highlight how CRAs may be compromised by circumstances. We confirm that this process is moderated by province, firm size and sector, and hence defines its boundary conditions, and draws out the implications of our findings for theory development, future research and practice.

Keywords: Credit ratings, state-owned enterprises, political connections, inflated ratings

JEL Classification: G14, G24, G32