Government Guarantee, Information Acquisition and Credit Rating Informativeness: Theory and Evidence from China

67 Pages Posted: 21 Jun 2021

See all articles by Hongyan Fang

Hongyan Fang

Shanghai University of International Business and Economics

Siguang Li

Cornell University, Dept. of Economics

Ronghua Luo

Southwestern University of Finance and Economics (SWUFE)

Yuyue Wang

Southwestern University of Finance and Economics, School of Finance

Date Written: September 1, 2020

Abstract

We examine the influence of implicit government guarantees on the information content of credit ratings in China, guided by a theoretical credit rating game model in the presence of government guarantees. Using issuers’ controlling shareholder identity as the defining metric of implicit government guarantees, we document a less sensitive relationship between credit ratings and primary market offer yields for SOE bonds (i.e., bonds issued by firms controlled by government or government related agencies) than that for non-SOE bonds. Moreover, ratings of non-SOE bonds have a stronger predictive power on both future downgrades and a market-based measure of issuer-expected default probability than those of SOE bonds. These findings are robust to considering the unobserved influence of the controlling shareholder identity on security pricing and bond default risk. Taken together, our empirical findings are consistent with the model’s prediction that government guarantees can dampen the incentives for credit rating agencies to acquire costly information, thus lowering the equilibrium informativeness of ratings for SOE bonds.

Keywords: Government Guarantee, Credit Ratings, Information Acquisition, Information Segregation, SOEs

JEL Classification: D83, G24, G28

Suggested Citation

Fang, Hongyan and Li, Siguang and Luo, Ronghua and Wang, Yuyue, Government Guarantee, Information Acquisition and Credit Rating Informativeness: Theory and Evidence from China (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3869873 or http://dx.doi.org/10.2139/ssrn.3869873

Hongyan Fang

Shanghai University of International Business and Economics

No. 1900, Wenxiang Road
Shanghai, 201620
China

Siguang Li (Contact Author)

Cornell University, Dept. of Economics ( email )

404 Uris Hall
Ithaca, NY Tompkins 14853
United States

HOME PAGE: http://www.siguangli.com

Ronghua Luo

Southwestern University of Finance and Economics (SWUFE) ( email )

Zhizhi Zone 236, 555 Liutai Avenue
Wenjiang District
Chengdu, Sichuan 611130
China

Yuyue Wang

Southwestern University of Finance and Economics, School of Finance ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
18
Abstract Views
226
PlumX Metrics