Abstract: Based on the data of Chinese corporate bonds over 2013-2017, we examine whether bond rating analysts, who are supposed to be unbiased in ratings, are affected by air quality. We find that the released credit ratings are generally lower on days of low air quality, which is consistent with the literature that air pollution can affect the mood of rating analysts. This negative impact is more pronounced when the bond issuers are in high-polluting industries. Nevertheless, intense competition among rating agencies can mitigate this negative impact. Further research reveals that the negative effect of air pollution is stronger if analysts work in heavily polluted areas. In our extension study, we also find that on days of high air pollution, rating analysts are less accurate in issuing credit ratings and investors are less sensitive to ratings adjustments made by rating analysts. Our results are robust to controlling for agency*time fixed effects, as well as additional specifications employing the instrumental variable approach, RDD test and placebo tests. Overall, these findings are consistent with the notion that air pollution represents a hidden cost to the capital market.

Key words: air pollution, credit rating, corporate bonds, emotions