Abstract
This article adds to the existing literature on global rating agencies (GRAs, i.e., the S&P, Moody’s, and Fitch) and domestic rating agencies (DRAs). In our research, we introduce the reputation, rating cost and rating accuracy of rating agencies to improve the Hotelling model. According to the theoretical analysis and empirical tests, the results show that the open policy of the Chinese rating industry contributes to higher rating quality in the domestic bond market. This open policy leads to rating convergence between DRAs and GRAs from in the long term.
Highlights
Ratings are important for the continuous development of the capital market
Based on the analysis, using an improved Hotelling model that considers both the short-term perspective and the long-term perspective, the results suggest that short-term competition among domestic rating agencies (DRAs) and GRAs cannot induce DRAs to improve their rating quality and reputation to increase their profits
The open policy of the rating industry has contributed to rating learning among DRAs and global-partnered rating agencies for a long time
Summary
Ratings are important for the continuous development of the capital market. the phenomenon of rating inflation is obvious in Chinese corporate bonds. With the rapid opening up of the Chinese bond market, the Ministry of Finance of the People’s Republic of China, China’s Commerce Ministry and China’s Foreign Ministry issued the Early Harvest of the One Hundred-Day Plan for China-USA Economic Cooperation on May 12th, 2017 This plan announced that the Chinese rating industry promised foreign rating agencies that it would provide rating services in China, and GRAs could apply for credit permits before July 16th, 2017. This study improves the Hotelling model and analyzes the competition among DRAs and GRAs from the short-term perspective and long-term perspective under the open policy of the rating industry.
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