Herding Behavior and Rating Convergence among Credit Rating Agencies: Evidence from the Subprime Crisis
35 Pages Posted: 7 Mar 2014
Date Written: December 6, 2013
This paper assesses how the presence of rating actions and discordant evaluations by a different rival credit rating agency (CRA) affects the timing of downgrades and the likelihood of rating convergence in the aftermath of the subprime crisis. We analyse a large sample of subprime mortgage-backed securities issued between 1992 and 2007, controlling for various characteristics of the issues. We show that, while Fitch is on average the first mover, Moody’s and S&P perform more timely downgrades given a downgrade by the other main CRA than by Fitch, and influence the latter more than they are influenced by it. Neither Moody’s nor S&P react with more timely revisions in the presence of a more severe rating by Fitch, while the downgrade hazard of all three main CRAs significantly increases in the presence of a lower rating by Moody’s or S&P. We also find that the likelihood of having a rating convergence by July 2011 is significantly higher when Fitch rather than Moody’s or S&P assigns the less severe rating before the onset of the crisis. Observing equal ratings by July 2011 is instead equally likely for tranches jointly rated by Moody’s and S&P, regardless of the direction of previous rating disagreements. Our results are consistent with theoretical predictions on the role of reputation in explaining herding behavior among CRAs.
Keywords: credit rating agencies, reputation, subprime, herding, financial crisis
JEL Classification: G01, G14, G24, G38
Suggested Citation: Suggested Citation