Do Credit Rating Agencies Piggyback? Evidence From Sovereign Debt Ratings
The author argues that when more than one credit rating agency rates an asset, each one has the incentive to put a weight on the competitors rating. This piggybacking allows an agency to increase the precision of its own rating while doing less monitoring. The author tests this hypothesis, using annual data on sovereign debt ratings by the three main credit rating agencies for 117 countries. The author shows that the probability of a rating change depends on the rating differential towards its competitors, even when accounting for an observable and unobservable common information set. Further evidence from the Euro Area sovereign debt crisis suggest that agencies are also influenced by the competitor's outlook or recent rating changes.