A collaborative paper by Research Center Director Professor Zhisheng Li (corresponding author), Associate Researcher Professor Ling Jin (first author), and Professor Guochao Yang, titled "Research on Structural Inflation of Bond Credit Ratings: From the Perspective of Primary-Secondary Market Differences in Municipal Investment Bonds," has been published in Economic Research Journal, Issue 12, 2025. This journal is classified as A+ at Zhongnan University of Economics and Law.

Abstract: 

Credit ratings serve as the "credit anchor" in bond markets; however, excessively inflated credit ratings hinder the identification of credit risks in bond markets and impede the rational pricing of such risks. This study selects bonds with risk characteristics similar to those of municipal investment bonds as a benchmark to compare the credit ratings of municipal investment bonds against this reference. The findings reveal structural rating inflation in the credit ratings of municipal investment bonds, a phenomenon that remains robust even after accounting for factors such as variations in rating standards and debt risk characteristics. The primary drivers of this inflation are the strong financing incentives of local governments and the intense competition among rating agencies. Further analysis shows that while inflated credit ratings significantly reduce issuance spreads in the primary bond market, secondary market trading spreads quickly adjust upward to reflect the actual credit risk of the bonds. This suggests that bond issuers benefit from inflated credit ratings by lowering debt financing costs, but secondary market investors identify the pricing distortions caused by rating inflation in the primary market, prompting adjustments to the issuance spreads. Mechanism analysis highlights the significant roles of intermediary reputation, bond market trading, and information mechanisms in shaping the relationship between rating inflation and bond pricing. Accordingly, it is essential to prioritize the improvement of the credit rating market, strengthen regulatory oversight of rating inflation, and fully leverage the functions of financial information intermediaries and the pricing mechanisms of the secondary market to support the comprehensive management of local debt.

Keywords: Municipal investment bonds / Credit rating inflation / Primary market issuance spreads / Secondary market trading spreads

Link: https://erj.ajcass.com/#/issue?id=122073&year=2025&issue=12

Author profile

Ling Jin is an Associate Professor at the School of Finance, Zhongnan University of Economics and Law. He holds a Ph.D. in Economics and is recognized as a "Wenlan Scholar" Young Scholar. His research interests include financial development, financial innovation, and financial markets. He has published numerous papers in both domestic and international renowned journals such as Economic Research Journal, Journal of Management Science, China Economic Quarterly, China Industrial Economics, Journal of Financial Research, and Journal of Financial Markets. He has led a Young Scientists Fund project of the National Natural Science Foundation of China and participated in several major projects, including the Key Program of the National Social Science Fund of China. His accolades include the Special Award for Outstanding Achievements in Think Tank Research (CTTI), the Annual Outstanding Paper Award from the Finance Association, and the Annual Outstanding Paper Award from Journal of Financial Research.

Zhisheng Li is a member of the Standing Committee and Vice President of the Southwestern University of Finance and Economics (SWUFE), as well as a Professor and Doctoral Supervisor at the university's School of Finance. His primary research interests include financial innovation, financial risk management, market microstructure, and regional financial development. He has led numerous research projects, including those funded by the Program of Introducing Talents of Discipline to Universities ("111 Project"), the Key Program of the National Social Science Fund of China, and both the Young Scientists Fund and General Program of the National Natural Science Foundation of China. His research findings have been published in journals such as Economic Research Journal, China Economic Quarterly, Journal of Financial Research, Journal of Banking and Finance, and Journal of Financial Markets.

Guochao Yang is a Professor and Doctoral Supervisor at the School of Accounting, Zhongnan University of Economics and Law. He is a Wenlan Distinguished Professor and has been selected for the Young Top-notch Talent program of the National High-level Personnel of Special Support Program. His research primarily focuses on the interactive relationships among macroeconomic and financial policies, institutional arrangements in the capital market at the meso-level, and corporate decision-making at the micro-level. His papers have been published in leading domestic and international academic journals such as Economic Research Journal, Management World, China Economic Quarterly, World Economy, Journal of Management Science, and Journal of Corporate Finance.