RESEARCH ARTICLE
Does reputation matter? Evidence on spatial competition in China's bond market
Xing Liu,
Lingxuan Yang,
Yu Liu,
Xing Liu
School of Economics and Business Administration, Chongqing University, Chongqing, China
Search for more papers by this authorCorresponding Author
Lingxuan Yang
School of Economics and Business Administration, Chongqing University, Chongqing, China
Correspondence
Lingxuan Yang, School of Economics and Business Administration, Chongqing University, No. 174 Shazheng Street, Shapingba District, Chongqing 400030, China.
Email: [email protected]
Search for more papers by this authorYu Liu
School of Economics and Business Administration, Chongqing University, Chongqing, China
Search for more papers by this authorXing Liu,
Lingxuan Yang,
Yu Liu,
Xing Liu
School of Economics and Business Administration, Chongqing University, Chongqing, China
Search for more papers by this authorCorresponding Author
Lingxuan Yang
School of Economics and Business Administration, Chongqing University, Chongqing, China
Correspondence
Lingxuan Yang, School of Economics and Business Administration, Chongqing University, No. 174 Shazheng Street, Shapingba District, Chongqing 400030, China.
Email: [email protected]
Search for more papers by this authorYu Liu
School of Economics and Business Administration, Chongqing University, Chongqing, China
Search for more papers by this authorFirst published: 21 August 2022
Abstract
This study investigates the effect of market competition on the reputational concerns of credit rating agencies (CRAs) in the Chinese bond market. We find credit ratings increase when the market share distance between an incumbent CRA and its closest peer competitor decreases. This spatial competition effect only exists at the provincial level. We also find the market competition deteriorates the ability of ratings to predict future bond defaults, while the correlation between credit ratings and market-implied credit spreads is unaffected. Our findings suggest that because of the market inefficiency in emerging economies, CRAs privilege current profits over reputational concerns.
Open Research
DATA AVAILABILITY STATEMENT
Data available on request from the authors.
REFERENCES
- Ahmed, A.S., Billings, B.K., Morton, R.M. & Stanford, M.H. (2002) The role of accounting conservatism in mitigating bondholder-shareholder conflicts over dividend policy and in reducing debt costs. Accounting Review, 77(4), 867–890.
- Alali, F., Anandarajan, A. & Jiang, W. (2012) The effect of corporate governance on firm's credit ratings: further evidence using governance score in the United States. Accounting and Finance, 52(2), 291–312.
- Allen, F., Qian, J. & Qian, M. (2005) Law, finance, and economic growth in China. Journal of Financial Economics, 77(1), 57–116.
- Alp, A. (2013) Structural shifts in credit rating standards. Journal of Finance, 68(6), 2435–2470.
- Asquith, P., Beatty, A. & Weber, J. (2005) Performance pricing in bank debt contracts. Journal of Accounting and Economics, 40(1-3), 101–128.
- Bae, K., Kang, J. & Wang, J. (2015) Does increased competition affect credit ratings? A reexamination of the effect of Fitch's market share on credit ratings in the corporate bond market. Journal of Financial and Quantitative Analysis, 50(5), 1011–1035.
- Bae, K., Driss, H. & Roberts, G.S. (2019) Does competition affect ratings quality? Evidence from Canadian corporate bonds. Journal of Corporate Finance, 58, 605–623.
- Baghai, R.P. & Becker, B. (2020) Reputations and credit ratings: evidence from commercial mortgage-backed securities. Journal of Financial Economics, 135(2), 425–444.
- Baghai, R.P., Servaes, H. & Tamayo, A. (2014) Have rating agencies become more conservative? Implications for capital structure and debt pricing. The Journal of Finance, 69(5), 1961–2005.
- Bar-Isaac, H. & Shapiro, J. (2013) Ratings quality over the business cycle. Journal of Financial Economics, 108(1), 62–78.
- Beatty, A., Gillette, J., Petacchi, R. & Weber, J. (2019) Do rating agencies benefit from providing higher ratings? Evidence from the consequences of municipal bond ratings recalibration. Journal of Accounting Research, 57(2), 323–354.
- Becker, B. & Milbourn, T. (2011) How did increased competition affect credit ratings? Journal of Financial Economics, 101(3), 493–514.
- Bills, K.L. & Stephens, N.M. (2016) Spatial competition at the intersection of the large and small audit firm markets. AUDITING: A Journal of Practice & Theory, 35(1), 23–45.
- Bolton, P., Freixas, X. & Shapiro, J. (2012) The credit ratings game. The Journal of Finance, 67(1), 85–111.
- Bonsall, S.B., Koharki, K. & Neamtiu, M. (2016) When do differences in credit rating methodologies matter? Evidence from high information uncertainty borrowers. The Accounting Review, 92(4), 53–79.
- Bonsall, S.B., Green, J.R. & Muller, K.A.I. (2018) Are credit ratings more rigorous for widely covered firms? The Accounting Review, 93(6), 61–94.
- Campello, M. (2006) Debt financing: does it boost or hurt firm performance in product markets? Journal of Financial Economics, 82(1), 135–172.
- Chan, D.K. (1999) “Low-balling” and efficiency in a two-period specialization model of auditing competition. Contemporary Accounting Research, 16(4), 609–642.
10.1111/j.1911-3846.1999.tb00598.x Google Scholar
- Chan, D., Ferguson, A., Simunic, D. & Stokes, D. (2004) A spatial analysis and test of oligopolistic competition in the market for audit services. ssrn.
- Chang, Z., Hu, X., Pan, Z. & Shi, J. (2021) Rating shopping: evidence from the Chinese corporate debt security market. Accounting and Finance, 61, 2173–2200.
- Chen, T., Leung, S. & Xie, L. (2021) Does credit rating conservatism matter for corporate tax avoidance? Accounting and Finance, 61, 5681–5730.
- Cheng, M. & Neamtiu, M. (2009) An empirical analysis of changes in credit rating properties: timeliness, accuracy and volatility. Journal of Accounting and Economics, 47(1-2), 108–130.
- Cheng, M. & Subramanyam, K.R. (2008) Analyst following and credit ratings. Contemporary Accounting Research, 25(4), 1007–1044.
- Dedman, E. & Lennox, C. (2009) Perceived competition, profitability and the withholding of information about sales and cost of sales. Journal of Accounting and Economics, 48, 210–230.
- DeHaan, E. (2017) The financial crisis and corporate credit ratings. The Accounting Review, 92(4), 161–189.
- Dimitrov, V., Palia, D. & Tang, L. (2015) Impact of the Dodd-Frank act on credit ratings. Journal of Financial Economics, 115(3), 505–520.
- Doherty, N.A., Kartasheva, A.V. & Phillips, R.D. (2012) Information effect of entry into credit ratings market: the case of insurers' ratings. Journal of Financial Economics, 106(2), 308–330.
- Fan, J.P.H. & Wong, T.J. (2005) Do external auditors perform a corporate governance role in emerging markets? Evidence from East Asia. Journal of Accounting Research, 43(1), 35–72.
- Goldstein, I. & Huang, C. (2019) Credit rating inflation and firms' investments. Working paper.
- Hotelling, H. (1929) Stability in competition. The Economic Journal, 153(39), 41–57.
10.2307/2224214 Google Scholar
- Kennedy, P. (1992) A guide to econometrics. Cambridge, MA: MIT Press.
- Kisgen, D.J. (2006) Credit ratings and capital structure. The Journal of Finance, 61(3), 1035–1072.
- La Porta, R., Lopez De Silanes, F., Shleifer, A. & Vishny, R.W. (1998) Law and finance. Journal of Political Economy, 106(6), 1113–1155.
- Lederer, P.J. & Hurter, A.P. (1985) Competition of firms: discriminatory pricing and location. Econometrica, 54(3), 623–640.
- Lee, K.K. & Schantl, S.F. (2019) Financial reporting and credit ratings: on the effect of competition in the rating industry and rating agencies' gatekeeper role. Journal of Accounting Research, 57(2), 545–600.
- Mathis, J., Mcandrews, J. & Rochet, J.C. (2009) Rating the raters: are reputation concerns powerful enough to discipline rating agencies? Journal of Monetary Economics, 56(5), 657–674.
- Numan, W. & Willekens, M. (2012) An empirical test of spatial competition in the audit market. Journal of Accounting and Economics, 53(1-2), 450–465.
- Petersen, M.A. (2009) Estimating standard errors in finance panel data sets: comparing approaches. The Review of Financial Studies, 22(1), 435–480.
- Piotroski, J.D. & Wong, T.J. (2012) Institutions and information environment of chinese listed firms. capitalizing China. University of Chicago Press, 2012, 201–246.
- Roychowdhury, S. & Srinivasan, S. (2019) The role of gatekeepers in capital markets. Journal of Accounting Research, 57(2), 295–322.
- Shleifer, A. (1998) State versus private ownership. Journal of Economic Perspectives, 12(4), 133–150.
- Stanton, R. & Wallace, N. (2018) CMBS subordination, ratings inflation, and regulatory-capital arbitrage. Financial Management, 47(1), 175–201.
- Tirole, J. (1988) The theory of industrial organization. Cambridge，MA: The MIT Press.
- Toscano, F. (2020) Does the Dodd-Frank Act reduce the conflict of interests of credit rating agencies? Journal of Corporate Finance, 62, 101595.
- Wang, X., Fan, G. & Hu, L. (2021) Annual report 2021 marketization index for china's provinces. Beijing: Social Sciences Academic Press. (in Chinese).
- Wong, T.J. (2016) Corporate governance research on listed firms in China: institutions, governance and accountability. Foundations and Trends in Accounting, 9(4), 259–326.
10.1561/1400000039 Google Scholar
- Xia, H. (2014) Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies? Journal of Finance and Economics, 111(2), 450–468.
- Yang, G. & Pan, Y. (2019) Is trust priced? Evidence from the bond market. China Journal of Finance, 1, 35–53.
- Young, A. (2000) The razor's edge: distortions and incremental reform in the People's Republic of China. The Quarterly Journal of Economics, 115(4), 1091–1135.
- Zhao, Z., Lin, W. & Song, F.M. (2018) Rating-based restrictions, credit rating inflation and bond covenants - evidence from the Chinese bond market. Working Paper.
