06 Feb 2020

First-mover disadvantage

The sovereign ratings mousetrap

Moritz Kraemer / Patrycja Klusak / Huong Vu

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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 are the first to document that the first mover CRA (S&P) in downgrades falls into a commercial trap. Namely, each first-mover downgrade by one notch by S&P results in a 2.4% increase in the probability of a rating contract being cancelled by the sovereign client, and a 1.2% decrease in the ratio of S&P’s sovereign rating coverage relative to Moody’s. The more first-mover downgrades S&P makes, the more their sovereign rating coverage declines relative to Moody’s. This paper interrelates three themes of the literature: herding behaviour amongst CRAs, issues of conflict of interest and ratings quality.

Keywords: Sovereign credit ratings, herding behaviour, conflict of interest

JEL classification: G15, G24