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| The Influence of Credit Rating Fee on Rating Quality: Based on the Annual Report of CRAs |
| LIAN Lishuai, HUANG Xiaolin, CHEN Guanting, SHEN Jiaying
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School of Economics and Management, East China Normal University;
School of Management, Minzu University of China;
Research Center for Smart Audit of SEM, Tsinghua University;
Human Resources and Social Security Information Center of Kunshan City, Jiangsu Province |
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Abstract Since a higher credit rating can reduce financing costs, the issuer may have an incentive to ask the rating agency to raise the credit rating. And in many cases, it is inflated above the reasonable rating level determined based on its solvency, etc., that is, credit rating inflation. Especially under the current issuer-paid model, it is difficult for credit rating agencies to maintain complete independence, and often issue inflated credit ratings in order to obtain higher rating fees in accordance with the requirements of bond issuers, which is called credit rating catering. In Chinese bond market, although from the 2006 “Administrative Measures for the Issuance of Securities by Listed Companies” to the “Interim Measures for Administration of Credit Rating Business at Securities Market” in 2019, the credit rating supervision policies have become more and more detailed, but the problem of credit rating inflation or inflated rating still plagues our country's bond rating market. The statistical results of this paper show that from 2010 to 2022, more than 80% of bond-issuing companies have obtained an AA or higher entity credit rating. Companies such as China Forestry Group, Shanghai Shimao, Yong Coal Holdings and Brilliance Auto, which have experienced bond defaults in recent years, were still issued AAA ratings before their bonds defaulted, indicating that there is a serious credit rating inflation phenomenon in practice.
According to the explanation of credit rating catering, the main purpose of rating agencies giving up independence is to obtain excess returns through rating fees. However, at present, credit rating regulators in developed countries or regions such as the United States do not require rating agencies or bond issuers to disclose commercial credit bond rating fees, and only municipal bond rating fees are concerned about rating fees (Cornaggia et al., 2023), and in China, rating fee data wasn't required to be disclosed mandatorily in practice before 2013. Due to the non-disclosure of rating fee information, and based on the difference between municipal bonds and commercial bonds, existing studies have not clearly revealed the relationship among credit bond rating fees, credit rating inflation, and credit rating quality.
On January 8, 2013, the National Association of Financial Market Institutional Investors issued the “Self-regulatory Guidelines on Credit Rating of Non-Financial Enterprise Debt Financing Instruments”, requiring credit rating agencies to annually publish last year's “Credit Rating Business Development and Compliance Operation Report” (hereinafter referred to as the “Annual Report”) before April 30 in the following year. The annual reports of each rating agency disclose the rating income information of various rating businesses, which provides a feasible research opportunity for directly examining the problem of credit rating inflation. Based on the rating income information released in the annual reports of our country's credit rating agencies from 2013 to 2022, this paper finds that high rating fees, especially the high fee deviation, lead to credit rating inflation and corresponding rating quality decline. The heterogeneity study found that among large credit rating agencies, the above tendencies converged when the degree of industry competition was low, the rating agencies were involved in bond defaults, and after the implementation of the Interim Measures for Administration of Credit Rating Business at Securities Market. The problem of low rating quality caused by the deviation of rating fees and high fees has converged. Finally, this paper also finds that there are situations where the fee is lower but the rating agency also issues a relatively high rating.
The main contributions of this paper are as follows: First, based on the institutional background of credit rating agencies disclosing Annual Report, it provides clearer and more direct empirical evidence on how rating fees affect credit rating inflation and credit rating quality, and enriches the theoretical explanation and literature of credit rating catering. Second, using the data of China's credit rating market, this paper finds that in the case of a fierce credit rating market and a limited role of reputation mechanism, competition will only aggravate the pandering behavior of rating agencies, resulting in more serious credit rating inflation, which provides a new explanation for the relationship between competition and reputation. Third, from the perspective of bond defaults and the impact of credit rating supervision policies on the reputation of rating agencies, this paper finds that government supervision will inhibit credit rating inflation, which provides new analytical dimensions and empirical evidence for revealing the relationship between government supervision and credit rating and its impact mechanism.
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Received: 06 August 2021
Published: 02 October 2025
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