The Impact of Credit Rating Adjustments on Bond Spreads: Evidence from China

Sinbad Kurbonov; Bobur Nasriddinov; Kessellie Traore Mulbah

doi:10.19044/esj.2024.v20n10p1

Sinbad Kurbonov SILC Business School, Shanghai University, China
Bobur Nasriddinov SILC Business School, Shanghai University, China
Kessellie Traore Mulbah SILC Business School, Shanghai University, China

DOI: https://doi.org/10.19044/esj.2024.v20n10p1

Keywords: Credit rating, bond spreads, credit rating adjustments, listing status, financial market

Abstract

Given the critical role of credit ratings in signaling issuer creditworthiness and influencing investor behavior, this paper aims to elucidate how adjustments in these ratings affect bond market spreads. Utilizing a comprehensive dataset spanning from 2016 to 2022, this research focuses on the Chinese bond market. Through regression analysis and heterogeneity tests, the findings reveal that credit rating adjustments significantly influence bond spreads, with upgrades narrowing spreads and downgrades widening them. Additionally, adjustments related to external support and firm performance also affect spreads, highlighting the importance of managing credit ratings for issuers. Overall, this study offers insights for investors, issuers, regulators, and academics, providing a better understanding of the dynamics between credit rating adjustments and bond pricing in China’s bond market, with implications for financial stability and economic development.

Downloads

Download data is not yet available.

Metrics

Metrics Loading ...

PlumX Statistics

References

1. Allen, R., & Alves, M. (2016). How to improve the financial oversight of public corporations. Fiscal Affairs Department How-To Notes, 16(05), 1–21. https://doi.org/10.5089/9781475551983.061
2. Beaver, W. H., Shakespeare, C., & Soliman, M. T. (2006). Differential properties in the ratings of certified vs. non-certified bond rating agencies. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.596626
3. Cleary, S. (1999). The relationship between firm investment and financial status. The Journal of Finance, 54(2), 673–692. https://doi.org/10.1111/0022-1082.00121
4. Cooke, C., & Bailey, F. (2015). The impact of credit rating changes on Jamaica’s global bond prices. Bank of Jamaica. https://boj.org.jm/uploads/pdf/papers_pamphlets/papers_pamphlets_The_Impact_of_Credit_Rating_Changes_on_Jamaicas_Global_Bond_Prices.pdf
5. deHaan, E., Li, J., & Watts, E. M. (2023). Retail bond investors and credit ratings. Journal of Accounting and Economics, 76(1), 101587. https://doi.org/10.1016/j.jacceco.2023.101587
6. Dichev, I. D., & Piotroski, J. D. (2001). The long‐run stock returns following bond ratings changes. The Journal of Finance, 56(1), 173–203. https://doi.org/10.1111/0022-1082.00322
7. Gao, H., Huang, Y., & Mo, J. (2022). Boosted credit ratings in China: The effects of credit enhancement on bond pricing. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3549270
8. Gilchrist, S., Wei, B., Yue, Z., & Zakrajsek, E. (2020). The Fed takes on corporate credit risk: An analysis of the efficacy of the SMCCF. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3686961
9. Hand, J. R., Holthausen, R. W., & Leftwich, R. W. (1992). The effect of bond rating agency announcements on bond and stock prices. The Journal of Finance, 47(2), 733–752. https://doi.org/10.2307/2329121
10. Hu, X., Huang, H., Pan, Z., & Shi, J. (2019). Information asymmetry and credit rating: A quasi-natural experiment from China. Journal of Banking and Finance, 106, 132–152. https://doi.org/10.1016/j.jbankfin.2019.06.003
11. Jarrow, R.A. &Turnbull, S.M. (1995). Pricing derivatives on financial securities subject to credit risk. The Journal of Finance, 50, 53–85. https://doi.org/10.1111/j.1540-6261.1995.tb05167.x
12. Jorion, P., & Zhang, G. (2007). Information effects of bond rating changes. The Journal of Fixed Income, 16(4), 45–59. https://doi.org/10.3905/jfi.2007.683317
13. Kariya, T., Yamamura, Y., & Inui, K. (2019). Empirical credit risk ratings of individual corporate bonds and derivation of term structures of default probabilities. Journal of Risk and Financial Management, 12(3), 124. https://doi.org/10.3390/jrfm12030124
14. Khorram, M., Mo, H., & Sanger, G. C. (2023). Information flow and credit rating announcements. Journal of Financial Markets, 65, 100837. https://doi.org/10.1016/j.finmar.2023.100837
15. Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of Finance, 29(2), 449–470. https://doi.org/10.2307/2978814
16. Michalski, L., & Low, R. K. (2024). Determinants of corporate credit ratings: Does ESG matter? International Review of Financial Analysis, 94, 103228. https://doi.org/10.1016/j.irfa.2024.103228
17. Piccolo, A., & Shapiro, J. D. (2022). Credit ratings and market information. The Review of Financial Studies, 35(10), 4425–4473. https://doi.org/10.1093/rfs/hhac005
18. Saadaoui, A., Elammari, A., & Kriaa, M. (2022). Credit rating announcement and bond liquidity: The case of emerging bond markets. Journal of Economics, Finance and Administrative Science, 27(53), 86–104. https://doi.org/10.1108/jefas-08-2020-0314