The Impact Of Default Events On Involved Rating Agencies Under The "Normalization" Of Bond Default

At the same time of the rapid development of China’s bond market,the rating industry has also risen rapidly.Since 2014,when China’s first public bond default occurred,the long-standing "rigid payment" situation in China’s bond market was broken,and since then China’s bond thunderstorms have climbed higher year by year,the default area has expanded from private bonds to public bonds,the default subjects have spread from small private enterprises to large and medium-sized enterprises and even state-owned enterprises,and the defaults have covered various bond types and the scale of defaults has been rising.The market is gradually not surprised by the occurrence of bond defaults,and China’s bond defaults have entered a "normalized" period.Most of the defaulted bonds are issued with rating levels that do not match their risks,and the phenomenon of high rating and high default exists.Therefore,in the wave of defaults,rating agencies are inevitable and have become the target of collective accusations and criticism by market investors and the public,and their reputation is challenged.In view of the above background,it is of strong practical significance to explore what impact the bond defaults have had on the credit rating agencies involved.Despite the widespread attention given,only a small number of scholars have conducted studies on the impact of bond defaults on the involved rating agencies themselves.According to the findings of previous literature,the reputation mechanism of China’s bond market does not play a good role in restraining the behavior of rating agencies,but in previous studies,the number of years in which bond defaults occurred in China was short,the number of samples of bond defaults was small,and it was difficult for the market and investors to judge the performance of rating agencies’ rating behavior.But by 2018,the number of bond defaults in the year was 143,and the scale of defaults amounted to 88.879 billion yuan,both doubled compared with 2017.The market and investors gradually accept the occurrence of bond defaults,and the phenomenon of "normalized" bond defaults has become a new trend in China’s bond market.Therefore,based on the background of "normalization" of default,this paper selects credit bonds issued during the twelve years from 2010 to 2021,and divides them into two groups of samples,including 2010-2017 as the sample before "normalization" of default and 2018-2021 as the sample after "normalization" of default.We constructed Ordered Logit models to investigate whether the rating agencies’ behavior changed after the default of the rated bonds under the "normalization" of bond default.This model is used to investigate whether the rating agencies’ behavior has changed after the default of the rated bonds under the "normalization" of bond default,and to portray the market reaction to the rating agencies from the perspectives of market share and credibility,and to verify this change in the behavior of the rating agencies from the side.This paper draws the following conclusions from the empirical study: First,before the "normalization" of bond defaults,the rating agencies involved were not warned by the bond defaults and still adopted exaggerated rating behaviors for subsequent new bond issues,and the reputation mechanism did not effectively restrain the rating agencies in China’s bond market;after the "normalization" of bond defaults,the reputation mechanism came into effect and the rating agencies involved tended to adopt a stricter rating attitude,raising the rating standards for new bond issues and adopting more cautious rating behaviors.Second,before the "normalization" of bond defaults,the exaggerated ratings of the rating agencies involved captured more benefits for them,as shown by a significant increase in their market share;after the "normalization" of bond defaults,the market share of the more involved rating agencies decreased significantly,and at this time,reputational benefits play a greater role,the more defaults involved the worse the reputation of the rating agencies,and their market competitiveness is lower,also verifying that the rating agencies in this period no longer exaggerate their ratings for short-term interests,but adopt more cautious rating behavior to maintain their reputation.Thirdly,regardless of whether bond defaults are "normalized" or not,bond defaults damage the credibility of rating agencies,and investors will lower their trust in rating agencies because they are involved in bond defaults and demand more investment returns,as evidenced by the fact that the high ratings given to issuers by the rating agencies involved are significantly less effective in reducing their financing costs,and therefore it is concluded that the increasingly cautious rating behavior is the inevitable trend adopted by the rating agencies against the background of default tends to be "normalized".Therefore,this paper proposes to strengthen the establishment of the reputation system of the rating industry in China’s bond market,strengthen the supervision of the rating industry,and the rating agencies need to cherish their own reputation and restrain their own behavior,so that the rating agencies can give full play to their role in the bond market,which is of certain practical value to promote the positive development of China’s rating industry.