The Effect Of Bond Default On Credit Rating Agencies' Behavior And Credibility

In China,the bond market has experienced significant growth since 2001,mainly because the economic growth stimulated huge demand for debt and equity financing.Using a sample of 8347 bonds that issued over the year 2007-2018.05 in Chinese bond market,this paper shows that Chinese CRAs(Credit rating agencies)that involved in bond defaults did not tighten the credit rating standard after bond defaults,but even inflated the credit rating of issuers in order to gain market share.?.Background or Regulation of CRAs in ChinaReputation is the most important asset for financial intermediaries.Once the default even happens,the involved CRA would face the investigation,punishment from regulators and market and question from investors.If reputation cost is high,then the CRA would get the warning from the default events and tighten their rating standard.But the reputation mechanism only works well in mature and developed bond market.However,as their reputation has been doubted after several bond default events,those CRAs' effort of catering to bond issuers did not offset the negative impact of bond defaults.Even certain CRAs,in order to cater to the issuers,loosen their credit rating standard after involving in bond defaults,their market share still suffered either a significant decline or low growth relative to the CRAs that are not involved.Furthermore,I also find a tendency of increasing interest spread after a CRAs is involved in default events.,which shows CRAs'function of reducing interest spread could be lower because of reputation loss.These findings are consistent with the view that market itself will promote well-functioning market and eliminate those rating agencies with bad performance.