Credit rating in dynamic response to the nature of firms and the business model of rating agencies: evidence from the Chinese bond market

This paper takes the A-share listed companies that issued credit bonds from 2010 to 2021 as the sample to test the probability and degree of credit rating change throughout the enterprise life cycle using the ordered logit and breakpoint regression models. Further, we study the heterogeneity of the above performance from payment models and firm natures. The results show that the credit rating inflation problem generally exists in all stages of the enterprise life cycle. The inflation is lower in the investor-pays model (state-owned enterprises), while the opposite results occur for the issuer-pays model (non-state-owned enterprises). Specifically, (1) the probability of a higher credit rating and the increased credit ratings show as an ‘inverse U’ in the enterprise life cycle. Credit rating increases if the enterprise successfully enters the growth phase, decreases if the enterprise fell into the decline phase. (2) In the investor-pays model, enterprises have a greater probability of obtaining a higher credit rating in the mature phase and a lower credit rating during the decline period. In the issuer-pays model, although the enterprise gets a smaller credit rating due to falling into the decline phase, the credit rating still has a high probability of belonging to a high credit rating. (3) State-owned enterprises have a higher probability of obtaining a high credit rating in the mature period and are more likely to have a low credit rating in the decline period. Generally, their credit rating quality is better than that of non-state-owned enterprises. In addition, in the context of the financing pressure period, the credit rating of non-state-owned enterprises decreases as they drop into the decline phase.