Information Gain or Information Distortion? The Impact of Multiple Issuer Ratings on Bond Rating Quality
OUYANG Yiling, WEN Huiyu, GAO Haoyu
School of Finance, Shanghai University of International Business and Economics; School of Management, Guangdong University of Technology; School of Finance/Center for Financial Policy Studies, Renmin University of China
Summary:
The high-quality development of the credit rating industry is an important safeguard for the efficient allocation of resources in the bond market. As China's rating industry transitions from a regulation-driven regime to a market-driven one, obtaining issuer ratings from multiple credit rating agencies simultaneously has become increasingly common, with nearly half of Chinese bond issuers rated by more than one agency. On the one hand, ratings from different agencies may provide cross-validation and generate information gains. On the other hand, maintaining rating relationships with multiple agencies may intensify competition among rating agencies and distort the information embedded in ratings. Whether multiple issuer ratings improve or impair bond rating quality is therefore an open empirical question with direct policy relevance. This paper first develops a game-theoretic model of the interaction between a bond issuer and credit rating agencies by extending the framework of Bolton et al. (2012). Under the issuer-pays model, an agency receiving an unfavorable private signal must weigh the business revenue from retaining the client against the expected reputational loss from issuing a distorted rating. Multiple issuer ratings make the issuer's threat of switching to another incumbent agency more credible and raise the agency's expected loss from losing the client relationship, thereby strengthening its catering incentive. The model predicts that rating catering is more likely to occur when the replacement threat is strong, the reputational constraint formed by cross-verification is limited, and market expectations of rating inflation are self-reinforcing, which explains why potential information gains are difficult to translate into higher rating quality. Using secondary market rating data on enterprise bonds, corporate bonds, and medium-term notes issued in China between 2014 and 2021, we find that bonds issued by firms holding multiple issuer ratings exhibit significantly larger and more upward-biased deviations of bond ratings from market-implied ratings. These results indicate that multiple issuer ratings reduce bond rating quality and manifest as rating inflation, supporting the rating catering hypothesis rather than the information gain hypothesis. To address endogeneity concerns, we conduct instrumental variable estimation based on the mandatory dual-rating requirement for super short-term commercial paper and include richer sets of fixed effects. The main results remain valid under these identification strategies and a battery of robustness checks. Mechanism analyses support the catering channel from both internal incentives and external discipline. On the internal side, the decline in rating quality concentrates in situations where rating agencies face greater competitive pressure and weaker bargaining power, such as when industry competition is more intense, when agencies face competitive pressure from large agencies, and when issuer-agency relationships have shorter histories. Consistent with the replacement threat, agencies assigning relatively lower ratings are more likely to be dismissed by issuers subsequently. On the external side, the discipline effect of regulatory penalties and the cross-verification provided by investor-paid ratings significantly mitigate the deterioration of rating quality. Further analysis shows that the evidence does not support rating shopping as an alternative explanation, and that information asymmetry amplifies, whereas higher transparency alleviates, the adverse effect of multiple issuer ratings. This paper contributes to the literature in three ways. First, it enriches the analysis of the economic consequences of multiple credit ratings from the perspective of rating business relationships, highlighting the strategic information production of rating agencies under competition. Second, it complements studies on the determinants of credit rating quality from the micro perspective of issuer-level rating relationships. Third, it provides a formal theoretical framework for understanding the information effects of multiple issuer ratings. The findings offer important policy implications. Improving the effectiveness of multiple ratings cannot rely solely on increasing the number of ratings. Instead, it requires fostering a healthy competitive environment in the rating market. Regulators should strengthen supervision and market discipline, promote investor-paid ratings as verification, and improve accountability for distorted ratings. Issuers should disclose differences in rating methodologies and improve transparency, so that growth in the number of ratings translates into genuine improvements in rating quality.
欧阳伊玲, 温慧愉, 高昊宇. 信息增益还是信息扭曲？多主体评级对债券评级质量的影响[J]. 金融研究, 2026, 555(9): 188-206.
OUYANG Yiling, WEN Huiyu, GAO Haoyu. Information Gain or Information Distortion? The Impact of Multiple Issuer Ratings on Bond Rating Quality. Journal of Financial Research, 2026, 555(9): 188-206.
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