Herding Behavior and Rating Convergence among Credit Rating Agencies: Evidence from the Subprime Crisis* | Zendy

Stefano Lugo | Zendy; Annalisa Croce | Zendy; Robert W. Faff | Zendy

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Herding Behavior and Rating Convergence among Credit Rating Agencies: Evidence from the Subprime Crisis*

Author(s) -

Stefano Lugo,

Annalisa Croce,

Robert W. Faff

Publication year - 2014

Publication title -

european finance review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1573-692X

pISSN - 1382-6662

DOI - 10.1093/rof/rfu028

Subject(s) - credit rating , downgrade , herding , subprime crisis , bond credit rating , herd behavior , reputation , convergence (economics) , business , economics , financial crisis , financial economics , financial system , actuarial science , credit reference , credit risk , political science , macroeconomics , computer security , computer science , law , forestry , geography

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.

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