Does ownership structure with multiple large shareholders affect credit ratings?

This study examines the relationship between multiple large shareholders (MLS) and corporate credit ratings. Using a sample of Chinese firms from 2007 to 2021, we find that credit rating agencies tend to assign lower credit ratings to firms with MLS than to firms with a single controlling shareholder. The negative relation is stronger with a higher perceived likelihood of large shareholder collusion, more severe shareholder-bondholder conflict of interests, and higher information asymmetry and weaker external monitoring, suggesting the mechanism behind the negative view of MLS by credit rating agencies is the heightened expropriation risk associated with MLS collusion. Further analyses show that MLS are associated with higher default probability, larger credit spreads, and higher ex-post risk-taking, confirming the rationality of the credit ratings. Moreover, stronger investor protection due to a recent regulatory change mitigates the negative effect of MLS. Overall, this study suggests that rating agencies incorporate the presence of MLS as an important non-financial factor in their credit assessment; the study also highlights a potential negative effect of MLS from the perspective of bond market participants.