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| Switching Rating Agencies: Rating Shopping and Rating Catering |
| LANG Xiangxiang, TIAN Yanan, CHI Guotai
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School of Economics and Management, Dalian University of Technology;
School of Management, Xiamen University |
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Abstract Credit ratings play an important role in information transmission and valuation in the bond market. In recent years, credit rating problems have cropped up frequently. One such problem is that some debt issuers frequently switch rating agencies and get higher credit ratings after switching. In view of this rating agency switching phenomenon, exploring the following questions is worthwhile. What is the motivation and purpose of switching rating agencies？ What is the economic effect of switching rating agencies？
This paper explores the effect of switching rating agencies on the credit ratings, default risk and issuance cost of corporate bonds in the exchange market from 2008 to 2017. We exclude financial institutions and corporate bonds rated by foreign rating agencies. We also exclude 1,501 bonds rated by two or more rating agencies. The final sample includes 1,657 issuers, 4,017 corporate bonds and 17,217 observations.
The results show that an issuer's subsequent rating is significantly better after a rating agency switch. Through a series of robustness tests, such as the construction of difference-in-differences models and the use of instrumental variables to alleviate endogeneity problems, the conclusions hold. This paper further explores the moderating influence of industry competition and the credit rating access boundary on the relationship between issuers' switching rating agencies and the credit ratings of corporate bonds. The results show that when issuers or rating agencies face fierce competition, the positive effect of switching rating agencies is stronger; that is, industry competition intensifies both the rating shopping behavior of bond issuers and the rating catering behavior of rating agencies. The results also show that the positive effect of switching rating agencies is stronger when the credit rating is at the AA rating boundary. Finally, this paper examines the consequences of issuers switching rating agencies and finds that it reduces the financing costs of corporate bonds, increases the default risk of corporate bonds and reduces the operating performance of the issuers.
Studies typically focus on the three major rating agencies in the United States. However, China's rating market is quite different from that of the U. S. First, the U. S. has internationally influential rating agencies with strong international reputations, such as Standard & Poor's and Moody's. In contrast, the reputations of Chinese rating agencies are relatively low. Second, the U.S. rating market is monopolistic, whereas China's rating market is highly competitive. Third, U.S. investors pay a great deal of attention to the rating reports issued by rating agencies and use the ratings as an important basis for investment decisions. However, the market reputation mechanism is not established in China, so investors put less weight on ratings . Therefore, this study provides empirical evidence for understanding the rating market of China.
This study contributes to the literature in several ways. First, most studies focus on the economic consequences of switching audit firms (Azizkhani et al., 2018), whereas this paper focuses on the motivation for and economic consequences of switching rating agencies. Second, this paper supplements the studies on rating shopping by issuers and rating catering by rating agencies. This paper provides a new research perspective by studying the behavior of bond issuers. The results show that rating shopping by bond issuers can significantly increase the credit ratings of corporate bonds, providing a reference for regulatory authorities to improve the regulatory system.
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Received: 14 January 2019
Published: 03 March 2022
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