The Dynamics of Credit Rating Disagreement

Abstract

The existence of multiple credit rating agencies (CRAs) and firms’ demand for multiple ratings suggests that there must be instances in which CRAs disagree. We investigate whether market-wide and firm-specific measures of uncertainty, private information, systematic risk and credit risk affect the dynamics of rating disagreement for multi-rated firms. We document that firm-specific uncertainty and private information of CRAs are the main drivers of rating disagreement. Our findings cast doubt on the value-added of multiple ratings per firm and hint at inconsistencies due to discretion, incentive problems, and strategic use of private information in the rating industry.

Keywords: Financial intermediation, Credit risk, Asymmetric information, Monitoring, CDS spreads

JEL Classification: G10, G24, D82