Herding behavior and rating convergence among credit rating agencies: Evidence from the subprime crisis

Stefano Lugo*, Annalisa Croce, Robert Faff

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

14 Citations (Scopus)

Abstract

This article examines how credit rating agencies (CRAs) react to rating decisions on mortgage-backed securities by rival agencies in the aftermath of the subprime crisis. While Fitch is on average the first mover, Moody's and S&P perform more timely downgrades given a downgrade or a more severe evaluation by a CRA other than Fitch, and they also influence Fitch more than they are influenced by it. Rating convergence is more likely when Fitch rather than the rival has to adjust its evaluation downwards. Our results support theoretical predictions on the role of reputation in explaining herding behavior among CRAs.

Original languageEnglish
Pages (from-to)1703-1731
Number of pages29
JournalReview of Finance
Volume19
Issue number4
DOIs
Publication statusPublished - 1 Jul 2015
Externally publishedYes

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