Punish One to Warn Others:The Deterrence Effects of Credit Rating Agency Regulation
In the context of an incomplete market restraint,administrative supervision plays an important role in regulating the behavior of credit rating agencies(CRAs).In 2018,the China Securities Regulatory Commission(CSRC)and the National Association of Financial Market Institutional Investors(NAFMII)jointly announced that Dagong Global Credit Rating Co.,Ltd.had been suspended from its credit rating business for one year.We examine whether and how the other CRAs respond to such an event.We find that this strict regulation disciplines the other CRAs to issue more downgrades and improve their credit rating quality.Further evidence shows that the effects of this regulation are concentrated in the short and medium term.Moreover,the other CRAs reduce their rating volatility and the probability of Type Ⅰ errors after such regulation,and investors trust more on credit ratings when issuing new bonds.Our results suggest that CRAs respond by improving their credit rating quality when their market power is threatened by the possibility of further regulatory intervention.
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