Abstract
This paper provides primary evidence of whether certification via reputable Credit Rating Agencies (CRAs) is beneficial to issuers in the bond market in China. After considering the issuer-reputable CRA match, we find bonds rated by the most reputable CRAs to be associated with lower yield spread (higher bond price), revealing the investors’ recognition on the rating quality of reputable CRAs. This result is consistent with the traditional certification hypothesis and underlying reputation mechanism. We further find that information environment and issuer’s risk are two mechanisms through which certification effect works. We also find this certification effect is reinforced after the entry of China Credit Rating (CCR), a new independent CRA.
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