Bond Credit Ratings Research Articles

Artificial intelligence adoption and credit ratings*

ABSTRACT Using 6,566 observations of bond credit ratings in China from 2010 to 2022, this paper empirically finds that artificial intelligence (AI) adoption by firms improves bond credit ratings via improving productivity and information transparency. Such a positive relationship is more pronounced when the issuers are non-state-owned enterprises, labor-intensive enterprises, or engage heavily in earnings management. This study enriches the literature of the influencing factors of credit ratings and the economic consequences of AI adoption. Furthermore, this study offers insights for enterprises seeking to leverage AI for reduced financing costs, and sheds light on future digital policy design.

Does the impact of credit rating downgrade on bond returns vary by region: Empirical evidence from China

Utilizing trading data from corporate and enterprise bonds that experienced credit rating downgrades between 2012 and 2022, this study employs event study methodology and regression analysis to examine the regional differences in the impact of credit rating downgrades on bond pricing and the mechanisms behind these effects. The study found that, during the window period when the bond credit rating is downgraded, there is a significant difference in the cumulative abnormal return of bonds between the eastern and non-eastern regions. Heterogeneity analysis indicates that bonds with higher credit ratings and those issued by non-state-owned enterprises are more significantly affected by credit rating downgrades. This study provides empirical evidence of regional disparities in the impact of credit rating downgrades, and proposes a theoretical mechanism whereby differences in the degree of marketization influence these effects through varying expectations of government implicit guarantees. The findings offer a theoretical foundation for optimizing decision-making by participants in the Chinese bond market.

The Influence of Liquidity on Bond Credit Ratings: Evidence from The Indonesian Corporate Bond Market

This study examines the effectiveness of various liquidity proxies in distinguishing between Investment Grade (IG) and High Yield (HY) bonds within the Indonesian corporate bond market. Utilizing logistic regression models across a dataset of 30,738 observations for IG bonds and 176 observations for HY bonds, we evaluated the impact of six liquidity proxies: Range Measure (RG), Hui Heubel ratio (HH), Market Share (MS), Interquartile Range (IR), Imputed Roundtrip Cost (IRC), and Trading Volume (TV). The findings reveal that the Imputed Roundtrip Cost (IRC) is the most reliable indicator of liquidity, demonstrating a significant negative relationship with the likelihood of a bond being classified as IG. This suggests that higher IRC values, which represent higher transaction costs, are associated with lower liquidity. In contrast, the other proxies, including the Hui Heubel ratio, did not show consistent or significant impacts in line with the hypotheses. The study concludes that IRC is the best measure for assessing liquidity in the Indonesian corporate bond market.

The Moderating Role of Leverage on Corporate Bonds Yield

This study aims to identify the effect of bond credit rating, firm size, profitability, and liquidity on the yield to maturity (YTM) of listed Indonesian corporate bonds, with leverage ratio as a moderating variable. A panel data multi-linear regression with the fixed effect estimator was used to investigate the YTM of 25 listed corporate bonds from 2019 to 2021. The sample data comprise complete financial reports published in the Indonesia Stock Exchange (IDX) market and operations in the non-financial sector to increase the accuracy of information obtained. The results show that profitability proxied to return-on-asset (ROA) and firm size positively affect the YTM, while the liquidity ratio proxied to the current ratio (CR) had a negative influence. As a moderating variable, leverage proxied to the debt-to-equity ratio (DER) positively moderates the effect of CR, DER negatively moderates the effect of ROA and DER cannot moderate the bond’s credit rating to influence the YTM. However, the bond’s credit rating does not affect the YTM. The analysis of corporate bonds is a relatively uncommon study in Indonesia, and significant implicating for policymakers, underscoring the importance of meticulous management of CR and DER, which can decrease the YTM.

Information processing costs and credit ratings: evidence from investor interactive platforms in China

We examine the impact on bond credit ratings of reduced information processing costs from two investor interactive platforms in China, i.e. ‘Easy Interaction’ and ‘e-Interaction’. These online platforms provide investors with a channel to directly communicate with listed companies and learn much of corporate operations. Replies and explanations from management assist investors in integrating disclosed information and reducing information processing costs. The reduced costs likely impose reputational concerns on credit rating agencies (CRAs), leading to more stringent rating standards and less rating inflation. We find that more interactions result in lower credit ratings of corporate bonds. This effect is more pronounced for bonds rated by global-partnered CRAs and bonds whose issuers have higher information complexity, and less pronounced for bonds whose issuers have official consultation websites. Further analyses show that reduced information processing costs are associated with more information contents in rating downgrades and timelier ratings. Our findings provide evidence for the disciplinary effect of reduced processing costs on CRA behavior.

Municipal Bond Credit Rating Access and Retail Investors’ Transaction Costs

ABSTRACT In 2010, the Municipal Securities Rulemaking Board proposed a rule change requiring the display of current credit ratings on the EMMA website, a centralized repository of municipal bond information. Before the rule change, current credit ratings were freely available on individual rating agencies’ websites or on EMMA if municipalities provided relevant continuing disclosures, making it unclear whether the rule change would benefit investors. A difference-in-differences analysis reveals the rule change is associated with a 6–8 basis-point decrease in investor transaction costs. This effect is concentrated among the intended beneficiaries (retail investors) when credit risk information demand is high (long-maturity bonds) and current credit rating information on EMMA is low (no continuing disclosure of rating changes was provided on EMMA). The rule change appears to have helped retail investors become aware of current credit ratings by filling a disclosure gap on EMMA for municipalities without continuing disclosures of rating changes.

Effectivenes of incentive constraint policies in enhancing green bond credit rating and certification: A theoretical and empirical study

This paper aims to effectively reduce CO2 emissions by examining the impact of three distinct incentive and constraint policies on the quality of rating and certification information in China’s green bond issuance market. To accomplish this, the government has implemented incentives, while regulators have introduced constraints to curb the spread of inflated rating and certification information. We build on the integrated rating and certification regulation mechanism by presenting a two-stage Stackelberg game model that involves four key participants: the China Securities Regulatory Commission, local governments, green evaluation and certification agencies, and credit rating agencies. We incorporate environmental effects indicators into the expected utility of rating and certification agencies to investigate the equilibrium conditions under three policy scenarios: a single financial incentive policy, a single regulatory constraint policy, and a combined incentive and constraint policy. The paper employs Stackelberg game theory to analyze how different policies mitigate the occurrence of “inflated” ratings and “greenwashing” in certifications. Numerical analysis is conducted to validate the theoretical findings. Moreover, we assess the impact of these policies on the quality of rating and evaluation information, using data from China’s green bond issuance market between 2016 and 2021. Our research offers valuable management insights and regulatory recommendations for both regulators and local governments.

감사기구의 커뮤니케이션 활동이 회사채 신용등급에 미치는 영향

감사기구의 커뮤니케이션 활동이 회사채 신용등급에 미치는 영향

Underwriter strength and credit spread of corporate bond issuance

This paper investigates the relationship between underwriter strength and bond issue credit spreads in China. We find that: underwriter strength affects bond issuance credit spreads. The stronger the underwriter, the smaller the bond issuance credit spreads and the lower the bond issuance cost; in terms of the mechanism of action, the underwriters can influence bond issuance credit spreads by influencing the bond credit ratings, i.e., the bond credit ratings play the role of the intermediary variable; the underwriter's strength reduces the bond issuance credit spread to a greater extent when the nature of the bond's ownership is a non-state-owned enterprise.

Fiscal-audit separation and government disclosure quality

We show that the separation of the fiscal and audit offices of China’s province-level governments leads to high fiscal disclosure quality, an effect that is more pronounced when the political rank of the official in charge of auditing is higher than that of the official in charge of fiscal matters. Dynamically, disclosure quality decreases when fiscal office and audit office go from being separated to being integrated and improves when they go from being integrated to being separated. Finally, fiscal disclosure quality reduces the cost of debt and improves credit ratings of municipal investment and development bonds. We demonstrate an aspect of China’s governance that, even without adequate monitoring from the oppositions or the media, local governments can improve efficiency via horizontal separations of fiscal and audit offices.

How and Why Does Green Bond Have Lower Issuance Interest Rate? Evidence from China

ABSTRACT This paper studies the issuing pricing character of green bonds with the evidence from China and further analyzes the reason why green factor affects bond issuing pricing by analyzing credit rating’s intermediary effect and exploring the mediating of policy incentives and third-party green certification. Furthermore, heterogeneity analysis is conducted to analyze how green factor impacts on bond issuing pricing at different quantiles and for companies in different industries or with different ownership. The findings include: (1) Green factor generally reduces the issuance interest rate of green bonds, though this effect is not significant at the low quantiles or at the early development stage. (2) Green factor’s impact on bond issuing pricing occurs partly by improving bond credit rating, fully by this way for companies in the construction industry, but directly for companies in other industries. (3) For non-state-owned companies, green factor has direct effect on bond issuing pricing, but this effect is not significant for state-owned companies. (4) Third-party green certification and incentive policies enhance the reducing effect of green factor on the issuance interest rate. This study provides a theoretical reference for environment-friendly investors, financiers with green projects and the regulators caring about green finance.

Bond Credit Rating Based on Machine Learning Model

Bond Credit Rating Based on Machine Learning Model

기업 신용등급이 회계 보수주의에 미치는 영향

[Purpose] The purpose of this study is to verify the relationship between corporate credit ratings and accounting conservatism. Previous studies focused on empirical analysis on whether accounting conservatism improves credit ratings or whether accounting conservatism is useful in the bond market.
 [Methodology] For this purpose, Basu (1997) and Ball and Shivakumar (2005) models, which are conditional conservatism models, were used for the KOSPI and KOSDAQ markets from 2011 to 2020. Bond credit ratings were used together with corporate credit ratings.
 [Findings] As a result of the analysis, we find that the lower the corporate credit rating, the stronger the accounting conservatism. It can be interpreted as using accounting conservatism as a means of improving the quality of accounting information by increasing the timeliness of bad news because companies with low corporate credit ratings have low stability. In addition, the negative relationship between corporate credit ratings and accounting conservatism was observed very robustly even when measured by bond credit ratings, sampled using foreign investors' equity, or analyzed by listed market.
 [Implications] The results of this study confirm that demand for conditional conservatism, which is highly demanded in the stock market, also exists in the bond market, as there is a mechanism to reduce agency costs and information asymmetry along with unconditional conservatism that understates net assets.

Environmental Risk and Credit Ratings, and the Moderating Effect of Market Competition.

This study examines the relationship between environmental risk and corporate bond credit ratings, and the moderating effect of market competition. We focus on Korean firms that are facing increasing risk of environmental crisis after the COVID-19 pandemic. Recently, the Korean government has been controlling businesses while promoting policies to transform the economy into a low-energy, low-carbon economy. We find that a firm’s greenhouse gas emission and energy consumption, which are direct indicators of environmental risk, are negatively associated with bond credit ratings. We also report that the negative effect of environmental risk on credit ratings is stronger in firms with low market competition. This study contributes to prior research by improving the understanding of the effect of environmental risk on credit ratings. In particular, it is significant to examine the effect of environmental risk, measured as direct environmental performance not affected by green washing, on credit rating. Therefore, we shed light on environment-oriented management beyond the determinants of credit ratings, which have been discussed in previous studies. We also suggest that policymakers need to manage market competition in terms of environmental justice, given that market competition has a significant moderating effect on the relationship between environmental risk and credit ratings.

Do participants in the bond market care about corporate social responsibility? Evidence from China

PurposeUsing a sample of listed Chinese companies that issued bonds from 2010 to 2019, the authors empirically test the link between CSR and corporate bond pricing, and the mechanism and channels behind this link.Design/methodology/approachThis study systematically examines whether and how corporate social responsibility (CSR) affects the corporate bond market in China.FindingsFirms with better CSR have higher corporate bond credit ratings and lower corporate bond yield spreads. These associations remain stable in robustness checks, including checks that use regional typhoon disaster as an instrumental variable. The effects of CSR are more significant for firms with a worse information environment and for those operating in high-risk environments. Better CSR is associated with less earnings management, fewer financial restatements and less analyst forecast divergence. In addition, the effects of CSR are more pronounced after the 2013 market-oriented reform and when issuers are non-state-owned enterprises.Practical implicationsBecause market participants can incorporate firms' CSR into their decision-making, establishing an effective channel for communicating CSR between issuers and market participants will enhance the effects of CSR.Social implicationsResearchers need to attend to the mechanisms behind the link between CSR and corporate bond pricing, and to the characteristics of strong environmental contingency in emerging markets, specifically the periods and scenarios in which the effects of CSR change.Originality/valueThis study provides systemic evidence that CSR benefits corporate bond pricing through both informational and reputational channels and that the effects of CSR vary by time and firm. These findings enrich the literatures on both the economic consequences of CSR and the determinants of corporate bond pricing, and provide a plausible explanation for mixed findings on the effects of CSR in previous studies.

Issuers’ Ownership Nature, Payment Modes and Bond Rating Quality: Evidence from CBRC in China’s Bond Market

This paper studies how the ownership nature affects the rating quality differences between investor-paid credit rating agencies （CRAs） and issuer-paid CRAs in China’s bond market. CRAs are important information intermediaries in the bond market. Their main task is to convey bond issuers’ credit risk information and alleviate the information asymmetry between issuers and investors. However, domestic CRAs have long been questioned about their low rating quality. These criticisms are mainly based on their optimism because a large portion of their ratings are either AA level or AA+ level. The issuer-paid mode adopted by most domestic CRAs is considered to be one of the most important factors causing their low efficiency. Under the issuer-paid mode, CRAs facing conflicts of interest may easily succumb to issuers’ demand for higher ratings.China Bond Credit Rating Co., Ltd. （CBRC）, the first investor-paid CRA in China, was established under policy in September 2010. Like foreign investor-paid CRAs, CBRC is independent but lacks access to private information. Its rating quality may not be better than issuer-paid CRAs. Issuers’ ownership nature might have an influence on CRAs’ behavior. Private firms and state-owned firms are faced with different financing environment. Private firms without implicit government guarantees rely heavily on credit ratings to reduce financing costs, while state-owned firms with implicit guarantees are less motivated to collude with CRAs. Private information is crucial to credit rating in private firms while it has a limited impact on credit ratings in state-owned firms. To conclude, issuers’ ownership nature affects both comparative advantages and disadvantages of investor-paid CRAs, so it has a comprehensive impact on rating quality.Taking CBRC as an example, the empirical findings are as follows: （1） Compared with the case that the issuer is a state-owned firm, when the issuer is a private firm, the information content of CBRC ratings is less, but the timeliness is stronger. （2） The more the conflicts of interest and the more the public information, the more the information content of CBRC ratings; and this phenomenon is more pronounced among private-owned issuers. These results show that CBRC ratings have independence advantages and information disadvantages at the same time. Overall, they provide incremental information based on issuer-paid ratings, especially when the issuer is a private-owned firm.The main contribution of this paper is that: Firstly, it focuses on how the ownership nature affects the rating quality differences between investor-paid CRAs and issuer-paid CRAs. Secondly, it compares the rating timeliness of investor-paid CRAs and issuer-paid CRAs, and supplements the literature on China’s credit rating research. Finally, it is of great significance to investors and regulators. Encouraging CRAs with multiple payment modes is conducive to improving the efficiency of resource allocation in China’s bond market.

The Effects of CFO Management on Corporate Bond Credit Ratings

The Effects of CFO Management on Corporate Bond Credit Ratings

Does the Financial Status of Company Affect the Bond Credit Rating? ——Empirical Evidence from China's Shanghai and Shenzhen Stock Exchanges

This article takes the companies that publicly issued corporate bonds on the Shanghai and Shenzhen Stock Exchanges from 2006 to 2018 as the research objects selecting six aspects that comprehensively reflect the 17 financial variables in 6 aspects: profitability, operating ability, bond repayment ability, development ability, cash flow and market value of the company. Principal component analysis method and factor analysis method are used to extract the principal factors of these financial indicator variables. That is how an ordered multi-classification Logistic regression model is constructed to test the impact of the Shanghai and Shenzhen Stock Exchanges’ financial status on the corporate bond credit rating. It turns out that the financial status of the Shanghai and Shenzhen Stock Exchanges have an important impact on the credit rating of corporate bonds. The financial status has a greater impact on corporate bonds with credit ratings of A- and AA-, while it has a smaller impact on corporate bonds with credit ratings above AA. The results of this article can help individual and institutional investors prevent risks from investing.

Independent Audit and Bond Covenants——Research on Corporate Bonds in China

Based on the bond data of corporate bonds in China, this paper examines the impact of independent audit on the design of bond contract protection terms. Using the audit quality of the accounting firm in the year of issuing bonds and the audit opinion of the previous year, the empirical study finds that high quality audit is positively related to the number of bond contract terms, while the standard unqualified audit opinion of the previous year is negatively related to it; moreover, the impact of high quality audit on bond issuance is more significant than that of audit opinion of the previous year .Further research shows that the above effects are more significant in state-owned enterprises and enterprises with high bond credit rating. This study provides a theoretical reference for independent audit to play the role of bond default governance in bond issuance.

Municipal Bond Credit Rating Access and Retail Investors’ Transaction Costs

Municipal Bond Credit Rating Access and Retail Investors’ Transaction Costs