ABSTRACT Sovereign Credit Ratings of many countries and credit rating of dozens of firms has been downgraded since the latest financial crisis. However in China short-term financing market, the credit rating seems to show a counter-cyclical phe- nomenon. We find that when the market and the economy upsurge, the bond principal rating is relatively poor; when the market and economy downturn, the bond principal rating is relatively high. In other words, the ratings of short-term financing bills show a counter-cyclical phenomenon. We propose the liquidity hypothesis for this phenomenon that during the period of economic prosperity, market liquidity and capital is relatively abundant; therefore even the compa- nies with poor ratings have access to raise funds. When the market downturns and liquidity is poor, there are not enough funds in the market, thus the companies with poor ratings may fall to finance due to the lack of funds. Therefore, the liquidity of the market causes the bond rating to show a counter-cyclical phenomenon. Empirical research supports this hypothesis.
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