Information Asymmetry and Credit Rating : A Quasi-Natural Experiment from China

This paper examines how the incumbent issuer-pay credit rating agencies (CRAs) in China adjust their rating strategies as a response to the entry of an independent rating agency, China Bond Rating (CBR), which utilizes a combination of public utility and investor-pay business model. We find that the CBR's rating coverage has effectively reduced the information asymmetry in the Chinese corporate bond market. This is evident by decreased rating inflation and increased informativeness of rating change announcements of incumbent issuer-pay CRAs. It appeared that the reputation concern is an important channel driving incumbent CRA's strategic rating reactions. Our paper sheds new light on the debate concerning whether CRAs with alternative business models can alleviate the information asymmetry problem