Liquidity Expectation, Financing Ability and Credit Rating: Evidence from China

DOI: 10.4236/me.2012.35083   PDF   HTML     4,558 Downloads   7,232 Views  

Abstract

Sovereign Credit Ratings of many countries and credit rating of dozens of firms has been downgraded since the latest financial crisis. However in China short-term financing market, the credit rating seems to show a counter-cyclical phe- nomenon. We find that when the market and the economy upsurge, the bond principal rating is relatively poor; when the market and economy downturn, the bond principal rating is relatively high. In other words, the ratings of short-term financing bills show a counter-cyclical phenomenon. We propose the liquidity hypothesis for this phenomenon that during the period of economic prosperity, market liquidity and capital is relatively abundant; therefore even the compa- nies with poor ratings have access to raise funds. When the market downturns and liquidity is poor, there are not enough funds in the market, thus the companies with poor ratings may fall to finance due to the lack of funds. Therefore, the liquidity of the market causes the bond rating to show a counter-cyclical phenomenon. Empirical research supports this hypothesis.

Share and Cite:

S. Tian, S. Zhu and B. Liu, "Liquidity Expectation, Financing Ability and Credit Rating: Evidence from China," Modern Economy, Vol. 3 No. 5, 2012, pp. 641-652. doi: 10.4236/me.2012.35083.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] W. F. Treacy and M. S. Carey, “Credit Risk Rating at Large US Banks,” Federal Reserve Bulletin, Vol. 84, No. 11, 1998, pp. 897-921.
[2] P. Nickell, W. Perraudin and S. Varotto, “Stabili-ty of Rat- ing Transitions,” Journal of Banking and Finance, Vol. 24, No. 1-2, 2000, pp. 203-227. doi:10.1016/S0378-4266(99)00057-6
[3] J. Amato and C. Furfine, “Are Credit Ratings Procycli- cal?” Journal of Banking and Finance, Vol. 28, No. 11, 2004, pp. 2641-2677. doi:10.1016/j.jbankfin.2004.06.005
[4] Y. F. Dong, “The Rare Continuous Downgrade on the Domestic Bond Market—Facing a New Round of Credit Crisis,” First Financial Daily, 11 September 2011.
[5] M. C. Robert, “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,” Journal of Finance, Vol. 29, No. 2, 1974, pp. 449-470.
[6] E. Jones, S. Mason and E. Rosenfeld, “Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation,” The Journal of Finance, Vol. 39, No. 3, 1984, pp. 611-625. doi:10.1111/j.1540-6261.1984.tb03649.x
[7] E. I. Altman, “The Success of Business Failure Prediction Models: An Inter-national Survey,” Journal of Banking and Finance, Vol. 8, No. 2, 1984, pp. 171-198. doi:10.1016/0378-4266(84)90003-7
[8] E. J. Elton, M. J. Gruber, D. Agrawal and C. Mann, “Ex- plaining the Rate Spread on Corporate Bonds,” Journal of Finance, Vol. 56, No. 1, 2001, pp. 247-261. doi:10.1111/0022-1082.00324
[9] Y. Jafry and T. Schuer-mann, “Measurement, Estimation, and Comparison of Credit Migration Matrices,” Journal of Banking and Finance, Vol. 28, No. 11, 2004, pp. 2603- 2639. doi:10.1016/j.jbankfin.2004.06.004
[10] E. Altman and H. Rijken, “How Rating Agencies Achieve Rating Stability,” Journal of Banking and Finance, Vol. 28, No. 11, 2004, pp. 2679-2714. doi:10.1016/j.jbankfin.2004.06.006
[11] E. J. Elton, M. J. Gruber, D. Agrawal and C. Mann, “Factors Affecting the Valu-ation of Corporate Bonds,” Journal of Banking & Finance, Vol. 28, No. 11, 2004, pp. 2747-2767. doi:10.1016/j.jbankfin.2004.06.008
[12] W. Perraudin and A. P. Taylor, “On the Consistency of Ratings and Bond Market Yields,” Journal of Banking and Finance, Vol. 28, No. 11, 2004, pp. 2769-2788. doi:10.1016/j.jbankfin.2004.06.009
[13] A. W. Butler and L. Fauver, “Institutional Environment and Sovereign Credit Rat-ings,” Financial Management, Vol. 35, No. 3, 2006, pp. 53-79. doi:10.1111/j.1755-053X.2006.tb00147.x
[14] K. Carling, T. Jacobson, J. Linde and K. Roszbach, “Corporate Credit Risk Modeling and the Macroecon- omy,” Journal of Banking & Finance, Vol. 31, No. 3, 2007, pp. 845-868. doi:10.1016/j.jbankfin.2006.06.012
[15] Q. Liang, “The Com-parison of the Western Securities Rating System and Its Impli-cations for China,” Securities Market Herald, Vol. 88, No. 11, 1999, pp. 41-44.
[16] Y. Q. He and Z. B. Fang, “The Bond Credit Rating and the Credit Risk,” Management Science, Vol. 16, No. 4, 2003, pp. 45-50.
[17] C. Chen and Z. M. Guo, “The Corporate Bond Financing, Financial Risk and the Bond Ratings of China,” The Con- temporary Finance & Economics, Vol. 279, No. 2, 2008, pp. 39-48.
[18] P. He and M. Jin, “The Influence of Credit Rating in the Bond Market in China,” Journal of Financial Research, Vol. 358, No. 4, 2010, pp. 15-28.
[19] M. G. Yu and H. B. Pan, “The Political Relationship, the Institutional Environment and the Bank Loans of the Pri- vate Enterprises,” Management World, Vol. 179, No. 8, 2008, pp. 9-21.
[20] D. L. Luo and L. M. Zhen, “The Private Control, Political Relationship and the Corporate Finance Constraints,” Fi- nancial Research, Vol. 342, No. 12, 2008, pp. 164-178.
[21] C. Chang, G. Liao, X. Yu and Z. Ni, “Informa-tion from Relationship Lending: Evidence from Loan Defaults in China,” Working Paper, 2009.
[22] J. Fan and T. J. Wong, “Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia,” Journal of Accounting Re- search, Vol. 43, No. 1, 2005, pp. 35-72. doi:10.1111/j.1475-679x.2004.00162.x
[23] S. Zhu, “The Characteristics of Ultimate Controller and the Informativeness of Accounting Earnings,” China Ac- counting and Finance, Vol. 8, No. 3, 2006, pp. 1-29.
[24] S. Zhu and D. L. Xia, “The Ac-counting Conservatism, Financing Constraints and the Capital Investment of the Listed Companies,” Finance and Economics, Vol. 36, No. 6, 2009, pp. 69-79.
[25] R. Cantor and F. Packer, “Differences of Opinion and Selection Bias in the Credit Rating Industry”, Journal of Banking & Finance, Vol. 21, No. 10, pp. 1395-1417. doi:10.1016/S0378-4266(97)00024-1

  
comments powered by Disqus

Copyright © 2020 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.