Abstract:
Credit rating aims to improve market efficiency by supplying credible public information. But due to rating-shopping behavior under the issuer-pay model, the reliability and the creditability of CRAs could be questionable. Based on Chinese corporate bond data, the paper examines how credit rating affects debt issuance costs. Like existing literature, OLS analysis shows that credit rating has significantly negative effect on debt issuance costs. However, the naive analysis suffers from endogeneity bias, and hence its result could be misleading. To tackle the endogeneity problem, we treat the competitiveness between CRAs as the ideal instrument for bond rating, and instrumental-based analysis further outlines that the effect of credit rating on debt issuance costs becomes economically smaller and statistically insignificant. This implies that CRAs in China do not provide valuable information that strongly influences the cost of capital.
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