The Effect of Investor-pay and Issuer-pay on Credit Rating: An Example of China Corporate Bonds

This article analyzes the effect of investor-pay model and issuer-pay model on credit rating. The sample is China corporate bonds listed on securities exchange and the data come from Wind Information and China Credit Rating Corporation. Comparing the ratings issued by China Credit Rating Corporation which follows investor-pay model to those issued by the others rating agencies which adopt the issuer-pay model. First, we test the difference between investor-pay model and issuer-pay model by using Paired Sample Test. Second, we use Ordered Logistic Model to explain the ordinal scale credit rating. Third, we test the structure of the models by using Chow test. Our evidence shows that the credit rating of investor-pay is significantly lower than the credit rating of issuer-pay. In financial characteristic, both investor-pay model and issuer-pay model sufficiently included the public financial information. In bond characteristic, the volume, maturity and listed market of investor-pay can be more appropriate explanation on credit rating. In corporate characteristic, the political connection, corporate governance and audit quality can also be more appropriate explanation on credit rating. Besides, the structures of all models have significant difference.