Blessing or Curse? The Effects of Credit Rating Standard Loosening in China

Issuer-paid rating standards in the Chinese corporate bond sector have been significantly loosened from 2006 to 2020. The average ratings rose by 1.73 notches for firms with the same fundamental strength. Loose ratings correspond to lower yield spreads and increased borrowing. Firms held more cash but invested less in capital assets and did not change research and development (R&D) inputs. Textual analysis reveals that their main bond issue purposes were to roll over existing debt. Loose ratings were followed by lower profitability and higher default risk, disagreeing with the idea that less stringent ratings positively affect firm performance by reducing financing costs. The effects are not entirely symmetric to those of rating standard tightening