Competition, ratings shopping, and yield spread: Evidence from China’s enterprise bond market

Abstract

Booming markets are a time of high risk and high returns, including the risk of misrepresenting the quality of an investment. China’s debt market is recently experiencing a booming period, and thus this paper presents empirical evidence of ratings shopping in the enterprise bond market. The evidence herein shows that some firms obtain higher credit ratings than they should, resulting in a lower cost of debt financing. We also find that investors become aware of this after multiple financing rounds and punish all clients of those ratings firms that inflate ratings, resulting in a so-called lemon market for the bonds of certain firms.