Can Credit Ratings Provide Private Information?

The rating quality of China’s credit rating has been a hot issue widely discussed in academic circles.As we all know,China’s credit rating industry started late,but developed rapidly,and the rapid development of the industry is inevitably accompanied by some problems.In recent years,the frequent occurrence of high credit rating bond defaults has triggered discussions and thoughts on credit rating from all walks of life.In terms of relevant literature,some scholars have conducted research on China’s credit rating as early as 2014,which before the first bond default occurred.And then there existed numerous related studies,but so far there is still no conclusion on whether China’s credit rating is effective.Summarizing the relevant literature,we found that most of the previous studies concluded that China’s credit ratings are ineffective.But in recent years,there are more and more results of research indicating that China’s credit ratings are effective or partially effective.This inconsistency is partly due to the lack of analysis of the information contained in credit ratings.A large number of scholars tend to bring in credit ratings as a whole without distinguishing the information contained in them,which may lead to bias when studying issues such as whether credit ratings are valid.Therefore,it is particularly important to refine the information contained in credit ratings.There is a great deal of information behind the seemingly simple symbol of credit rating.According to current research,credit ratings contain both public and private information,where public information refers to information that bond issuers and investors can share,covering corporate fundamentals.While private information refers to information that issuers have more information about a company than investors.According to the efficient market theory,the public information of financial category has been fully reflected in the market price,so private information is the key factor affecting the credit spread of bonds.According to information asymmetry theory,the party who possesses private information can profit in the market by passing it to the party with less private information.So private information play an important role in bond issuance.This paper examines the effectiveness of credit ratings in China and the differences of private information among different rating agencies and issuers from the perspective of private information of credit ratings.At the level of empirical methods,this paper first builds the ordered probit model to predict credit ratings with public information,and constructs the predicted credit ratings in the regression results,and then differs the predicted credit ratings from the actual credit ratings to obtain the private information variables.Second,the private information variable in credit ratings is regressed on the credit spreads of bonds in a least squares regression to test the quality of credit ratings in China.Then,the differences of private information in credit ratings issued by different rating agencies are investigated.Finally,the effect of whether an issuer firm is a listed company on its private information of credit rating is investigated.In the robustness test section,this paper uses replacement of the explanatory variables and the establishment of Propensity Score Matching(PSM)model to verify the results,and the test results support the relevant findings.The results of this paper show that: firstly,China’s credit ratings contain private information.When regressing credit ratings on progressively increasing explanatory variables according to financial indicators,issuer characteristics,and bond characteristics,a significant increase in the fit of the regression results is found,indicating that China’s credit ratings contain multidimensional information.When regressing credit spreads with private information to test the quality of ratings,the private information variable is significant at the 1% significance level,indicating that private information of credit ratings profoundly affects the quality of ratings.Secondly,private information of credit ratings has a significant negative relationship with bond issuance cost.The more private information contained in credit ratings,the more thorough the understanding of the issuer’s condition is,and accordingly,the lower the bond issuance cost is.Thirdly,the credit ratings issued by different rating agencies contain different private information,and the quality of ratings varies.The private information contained in the credit ratings issued by joint venture rating agencies is significantly and negatively related to the bond issuance cost,while the relationship between the private information contained in the credit ratings issued by domestic credit rating agencies and the bond issuance cost is not significant.This finding indicates that there is still a gap between the rating quality of China’s rating agencies and that of international rating agencies.Fourthly,the private information contained in credit ratings is related to whether the issuer company is a listed company or not.The credit ratings of non-listed companies contain more private information than listed companies,and the quality of ratings is relatively higher.Comprehensive analysis of the above,this paper concludes that China’s credit ratings are partially effective,and the quality of ratings varies with credit rating agencies,rating targets,etc.