We explore how regulatory shock to credit rating agencies caused by a regulatory action against Dagong affects investors'perception of the quality of credit ratings issued by other rating agencies.We find that market participants increase their reliance on credit ratings as a whole,yielding a stronger negative relation between credit ratings and bond spreads after the event.The effect is stronger for issuers rated by credit rating agencies with low reputation,issuers in areas with weak legal environments,state-owned enterprise issuers,and issuers in top-level rating segment.We further find a stronger reaction of stock investors to credit rating changes after this reputational shock.Our findings enrich the studies on the important role of reputation and regulation in credit rating industry and have policy implications for regulators.
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