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The impact of client defaults on inflated rating of credit rating agencies: Evidence from China

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  • Huang, Rui
  • Hooy, Chee-Wooi

Abstract

This study examines whether issuer client defaults influence credit rating agencies (CRAs) to reduce inflated ratings. Using data of Chinese listed companies from 2010 to 2023, the empirical results indicate that when the issuers served by a CRA experiences more defaults, the CRA is more likely to reduce inflated rating when serving other issuers. Further analysis reveals that state-owned enterprises, lower rating tier issuers and issuers with geographical proximity to CRAs are more significantly affected by defaults. Overall, our findings suggest that client defaults exert a corrective impact on CRA behavior to provide more accurate rating.

Suggested Citation

  • Huang, Rui & Hooy, Chee-Wooi, 2025. "The impact of client defaults on inflated rating of credit rating agencies: Evidence from China," Finance Research Letters, Elsevier, vol. 85(PA).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pa:s1544612325011365
    DOI: 10.1016/j.frl.2025.107878
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