First‐mover disadvantage: the sovereign ratings mousetrap

Klusak, Patrycja; Kraemer, Moritz; Vu, Huong

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.

Citation

Klusak, P., Kraemer, M., & Vu, H. (2022). First‐mover disadvantage: the sovereign ratings mousetrap. Financial Markets, Institutions & Instruments, 31(1), 3-44. https://doi.org/10.1111/fmii.12155

• Journal Article Type: Article
• Acceptance Date: Dec 15, 2021
• Online Publication Date: Jan 18, 2022
• Publication Date: Jan 18, 2022
• Deposit Date: Sep 11, 2023
• Publicly Available Date: Sep 11, 2023
• Journal: Financial Markets, Institutions and Instruments
• Print ISSN: 0963-8008
• Electronic ISSN: 1468-0416
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 31
• Issue: 1
• Pages: 3-44
• DOI: https://doi.org/10.1111/fmii.12155
• Keywords: Sovereign credit ratings, herding behaviour, conflict of interest,solicitation
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/fmii.12155
• Additional Information: Data Access Statement : Please refer to Appendix Table 3 for a full list of episodes.