Business Environment and Bond Credit Ratings: Evidence from China’s Bond Market

This paper constructs a city-level business environment index using firm registration data from the State Administration for Industry and Commerce (SAIC) of China. Using bond issuance data from China’s bond market between 2008 and 2021, the study finds that the business environment improves bond credit ratings. To address potential endogeneity concerns, we adopt the merchant guild culture as an instrumental variable and the Streamlining Administration and Delegating Power (SADP) reforms as a quasi-natural experiment. Heterogeneity tests reveal that the impact of the business environment is greater for firms with operational vulnerability and firms in developed regions. It is also stronger for bonds in the energy sector and bonds with greater prefectural green awareness, indicating the supportive role of the business environment in advancing China’s carbon neutrality agenda. Mechanism tests suggest that the business environment enhances bond credit ratings by increasing operating income and profit, reducing information asymmetry, and improving the level of marketization. These findings provide meaningful policy implications for further improving the business environment and achieving carbon neutrality in the bond market.