An Empirical Study on Credit Rating Inflation in the Korean Corporate Bond Market

Kang, Kyeong Hoon; Bae, Young Soo; Han, Jae Joon

Korean Journal of Financial Studies 2015;44(1):221-245.
Published online February 28, 2015.

Kyeong Hoon Kang, Young Soo Bae, Jae Joon Han

국내 회사채 시장의 등급인플레이션 분석

강경훈, 배영수, 한재준

Abstract

During the recent global financial crisis, CRA (Credit Rating Agency)s’ risk underestimation and delayed rating adjustments to distressed-debt have been criticized. Particularly, the possibility of rating inflation or rating shopping has been raised. This issue is closely related with the ‘issuer-pay’ business model and the consequent incentive problems in the credit rating industry. There is a suspicion of the same kind of rating inflation or rating shopping problem in the Korean corporate bond market. This paper empirically tests the existence of the incentive problems, comparing AR (Agency Rating) and BIR (Bond Implied Rating) for corporate bonds issued by Korean firms. We find that the rating inflation exists after controling 2009 financial crisis aftermath. We also find that the rating inflation is more likely to occur in the corporate bonds issued by medium level conglomerates, top twenty six to fifty conglomerates. The Korean government needs to tackle with these incentive problems. Considering both the short history of Korea CRA industry and the low level of reputation building, the government can introduce a separate public credit rating authority whichs assign credit rating jobs to a pool of approved CRAs.

Key Words: "Issuer Pays" Business Model,등급쇼핑,등급인플레이션,발행자지급 수익모델,신용평가사,채권내재등급,Bond Implied Rating,CRA,Credit Rating Agency,Rating Inflation,Rating Shopping