On The Factors Affecting The Rating Quality Of Credit Rating Agency

On the question that what factors are relevant to credit rating quality, there have been very few researches in academic world. Some only researches focus on competition between rating agencies, and type of bonds, while this study will broaden our horizon to character of rating agencies, issuers and intermediary agencies. The first key finding is that international cooperation improves rating quality. And secondly, bonds issued by state owned enterprises would illustrate a worse rating quality. Thirdly, bond underwrote by investment bank with greater market share would show worse rating quality, but this conjecture is not fully proved.To study on factors mentioned above, solid methodology is required to be explored for evaluation of rating quality. Some studies on other topics have designed this kind of methods, including assessment of the correlation between default rate and credit rating, credit migration matrix, market implied rating, etc. However there are intrinsic disadvantages for these methods. In this research, new measures are designed based on correlation between bond yield and rating, for bond with better credit rating will show a higher yield in market. For cross check, we examine the magnitude that rating agencies would upgrade their rating when issuers are seeking new rating agencies. This magnitude could be a proxy for agencies’willingness to inflate their rating for business purposes, thus a measure for quality of rating.