The Influence Of Corporate Governance Of Credit Rating

This paper investigates the effect of corporate governance on credit rating (both issuer rating and bond rating). In addition to default risk, do credit rating agencies pay attention to the corporate governance? Specifically, this study attempts to show whether corporate governance affects credit rating and how it works.Standing from the bondholder’s view, two kinds of agency problems are considered, both the conflict between manager and stakeholder and the conflict between shareholder and bondholder.This paper documents that corporate governance affects credit rating. After controlling for accounting characteristics, this research finds issuer credit rating is positively related to the controlling shareholder’s ownership, state-owned holding and dual-listing, and negatively related to relative scale of audit fee. These results indicate that, different from shareholder’s aim of maximizing firm value, the biggest concern of bondholder is the guarantee of debt redemption, resulting in an appreciation in state-owned holding. The relative scale of audit fee can be seen as a sign of economic bonding of client firm and audit firm, and credit rating agencies perceive that the economic bonding threatens the independence of auditing and the quality of financial reporting. This research also finds that bond specific characteristics are critical to bond rating, with collateral playing a key role in enhancing the credit of bond.