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Does reputational capital affect credit rating agencies?: empirical evidence from a natural experiment in China

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  • Wenming Xu

    (School of Law and Economics and Qian Duansheng Junior Faculty At China University of Political Science and Law)

  • Yan Liu

    (Tilburg University
    Research Department At China Lianhe Credit Rating)

Abstract

The subprime mortgage crisis of 2007–2008 has led major economies to reform their credit rating regulations, and China is not an exception. This paper employs a difference-in-difference research design to investigate whether the reputational capital of credit rating agencies affects their rated bonds. The first market-oriented evaluation of the Chinese inter-bank bond market is chosen as the source of the exogenous reputational shock. Using the medium term notes rated by China Chengxin International Credit Rating as benchmarks, a causal relationship is identified revealing that the average yield spread at the issuance of medium term notes, as rated by China Lianhe Credit Rating, increases by between 0.23 and 0.33% due to its decreased reputational capital. This research provides favorable evidence for the recent reform measures that aim to increase the disciplinary power of reputational capital.

Suggested Citation

  • Wenming Xu & Yan Liu, 2021. "Does reputational capital affect credit rating agencies?: empirical evidence from a natural experiment in China," European Journal of Law and Economics, Springer, vol. 51(3), pages 433-468, June.
  • Handle: RePEc:kap:ejlwec:v:51:y:2021:i:3:d:10.1007_s10657-021-09697-3
    DOI: 10.1007/s10657-021-09697-3
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