The gap between credit rating theory and practice: evidence from bond issuers in China

Abstract

As a significant part of the bond market, credit rating means a lot to investors and issuers. Few studies compare the differences between the existing rating methods and the actual credit performance (default/non-default) based on the underdeveloped bond market, which fails to guide the application of credit rating methods in the real market. The problem of the low rating quality of China’s rating agencies has been failing to meet the challenge. The reference function of rating for credit risk prevention and bond pricing has been weakened or even invalid. From a quantitative perspective, this paper focuses on the validity of rating results and the shortcomings of the mainstream rating framework. The results show that the current methods pay too much attention to total assets size but ignore the debt burden and profitability of enterprises, which is different from the actual default impact factor. This finding supports the macroeconomic policy of urging the establishment of a rating quality verification mechanism with default rate as the core, meaning it is conducive to constructing a healthy credit market.