First‐mover disadvantage: the sovereign ratings mousetrap
Publication Date
2022-02Journal Title
Financial Markets, Institutions & Instruments
ISSN
0963-8008
Publisher
Wiley
Language
en
Type
Article
This Version
AO
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Metadata
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Klusak, P., Kraemer, M., & Vu, H. (2022). First‐mover disadvantage: the sovereign ratings mousetrap. Financial Markets, Institutions & Instruments https://doi.org/10.1111/fmii.12155
Abstract
Abstract: Using 102 sovereigns rated by the three largest credit rating agencies (CRA), S&P, Moody's and Fitch between January 2000 and January 2019, we document that the first‐mover CRA (S&P) in downgrades falls into a commercial trap. Namely, each sovereign downgrade by one notch by the first‐mover CRA (S&P) results in 2.4% increase in the probability of a rating contract being cancelled by the sovereign client. The more downgrades S&P makes in a given month, the more their sovereign rating coverage falls relative to its rivals. Our results are more pronounced for downgrades on small sovereign borrowers than on large sovereign borrowers. This paper explores the interaction between three themes of the literature: herding behaviour amongst CRAs, issues of conflict of interest and ratings quality. Our empirical evidence gives credence to, and underscores the need for sovereign ratings to be made in an impartial way and independent of their commercial ramifications elsewhere in the CRA.
Keywords
G15, G24, ORIGINAL ARTICLE, Sovereign credit ratings, herding behaviour, conflict of interest, solicitation
Identifiers
fmii12155
External DOI: https://doi.org/10.1111/fmii.12155
This record's URL: https://www.repository.cam.ac.uk/handle/1810/333159
Rights
Licence:
http://creativecommons.org/licenses/by-nc-nd/4.0/
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