A cooperative paper entitled "Research on the Structural Inflation of Bond Credit Ratings——From the Perspective of the Difference between the Primary and Secondary Markets of Urban Investment Bonds" by Associate Professor Jin Ling (first author) from the School of Finance, Zhongnan University of Economics and Law, Professor Li Zhisheng (corresponding author) from Southwestern University of Finance and Economics, and Professor Yang Guochao from the School of Accounting, Zhongnan University of Economics and Law, was published in the 12th issue of 2025 of Economic Research, which is an A+ class journal recognized by Zhongnan University of Economics and Law.

Abstract

Credit rating is the "credit anchor" of the bond market, but excessively inflated bond credit ratings are not conducive to identifying credit risks in the bond market and reasonably pricing risks. This paper selects bonds with similar risk characteristics to urban investment bonds as the reference benchmark, compares the differences between the credit ratings of urban investment bonds and the reference benchmark, and finds that there is a structural rating inflation phenomenon in the credit ratings of urban investment bonds. This phenomenon remains robust after considering factors such as differences in rating standards and debt risk characteristics. The strong financing motivation of local governments and the fierce competition among rating agencies are the main incentives for the inflation of urban investment bond credit ratings. Furthermore, although inflated urban investment bond credit ratings can significantly reduce the bond issuance spread in the primary market, the trading spread in the secondary market will rise rapidly to reflect the actual credit risk of the bonds. This finding indicates that bond issuers use inflated credit ratings to reduce debt financing costs, but secondary market investors identify the primary market pricing distortion caused by rating inflation, prompting the secondary market to adjust the issuance spread of the primary market. Mechanism analysis finds that the reputation of intermediary institutions, bond market transactions, and information mechanisms have an important impact on the relationship between rating inflation and bond pricing. Therefore, great importance should be attached to improving the credit rating market, strengthening the supervision of rating inflation, giving full play to the role of financial information intermediaries and the pricing function of the secondary market, and helping the comprehensive management of local debt.

keywords:urban investment bonds;credit rating inflation;bond issuance spread in the primary market;trading spread in the secondary market

Author Introduction

Jin Ling, Associate Professor of the School of Finance, Zhongnan University of Economics and Law, Doctor of Economics, and "Wenlan Scholar" Young Scholar. Her research interests include financial development, financial innovation, and financial markets. She has published many papers in well-known domestic and foreign journals such as Economic Research Journal, Journal of Management Sciences in China, Quarterly Journal of Economics, China Industrial Economics, Journal of Financial Research, and Journal of Financial Markets. She presides over the Youth Science Fund Project of the National Natural Science Foundation of China, participates in many research projects such as the Major Project of the National Social Science Foundation of China, and has won awards including the Special Prize for Excellent Achievements in CTTI Think Tank Research, the Annual Excellent Paper Award of the Finance Alliance, and the Annual Excellent Paper Award of Journal of Financial Research.

Li Zhisheng, Member of the Standing Committee and Vice President of Southwestern University of Finance and Economics, Professor and Doctoral Supervisor of the School of Finance, Southwestern University of Finance and Economics. His main research interests include financial innovation, financial risk management, market microstructure, and regional financial development. He has presided over many projects such as the Program of Introducing Talents of Discipline to Universities ("111 Project"), the Major Project of the National Social Science Fund, and the Youth Program and General Program of the National Natural Science Foundation of China. His research achievements have been published in journals such as Economic Research Journal, Quarterly Journal of Economics, Journal of Financial Research, Journal of Banking and Finance, and Journal of Financial Markets.

Yang Guochao, Professor, Doctoral Supervisor, and Wenlan Distinguished Professor of the School of Accounting, Zhongnan University of Economics and Law. He mainly conducts research on the interactive relationship between macroeconomic and financial policies, meso capital market system arrangements, and micro enterprise behavior decisions. His papers have been published in authoritative academic journals at home and abroad, such as Economic Research Journal, Management World, Quarterly Journal of Economics, World Economy, Journal of Management Sciences in China, China Industrial Economics, Journal of Financial Research, Accounting Research, Journal of Quantitative & Technical Economics, China Journal of Accounting Studies, and China Journal of Accounting Research.