Boosted Credit Ratings in China: The Effects of Credit Enhancement on Bond Pricing

64 Pages Posted: 1 Apr 2020 Last revised: 21 Dec 2021

See all articles by Haoyu Gao

Haoyu Gao

Renmin University of China

Yuting Huang

Capital University of Economics and Business

Jingyuan Mo

New York University

Date Written: December 21, 2021

Abstract

More than 30% of credit bonds in China issued during 2009 and 2019 received improved issuance ratings, 97.1% of which used credit enhancement. We find that credit enhancement can lower credit spreads. The risk reduction and loss-sharing explanations serve as underlying mechanisms for the credit enhancement effects. The information-production and liquidity-improvement channels are excluded. Our findings remain robust after using the propensity score matching method, instrumental variable approach, and firm-year fixed effects. This paper highlights the functionality of credit enhancement vehicles as they provide a solution for low-rated firms to issue high-rated bonds and to lower the cost of debt financing.

Keywords: credit enhancement, financing costs, credit bonds, China

JEL Classification: G10, G12, G15, G19

Suggested Citation

Gao, Haoyu and Huang, Yuting and Mo, Jingyuan, Boosted Credit Ratings in China: The Effects of Credit Enhancement on Bond Pricing (December 21, 2021). Available at SSRN: https://ssrn.com/abstract=3549270 or http://dx.doi.org/10.2139/ssrn.3549270

Haoyu Gao

Renmin University of China ( email )

Mingde main building
Haidian district, No. 59,
Beijing, Beijing 100872
China

Yuting Huang

Capital University of Economics and Business ( email )

Beijing
China

Jingyuan Mo (Contact Author)

New York University ( email )

44 West 4th Street
Finance Department
New York, NY NY 10012
United States
212-998-0365 (Phone)

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