Do rating agencies exhibit herding behaviour?: evidence from sovereign ratings

Chen, Zhongfei; Matousek, Roman; Stewart, Chris; Webb, Rob

Abstract

We assess the presence of herding by considering the lead-lag relationship of sovereign ratings assigned by the three main rating agencies at the individual country level. Given that different rating agencies may have different levels of expertise (reputation) for different countries it is not obvious that such homogeneity holds. We therefore conduct poolability tests within this context to assess this assumption and find evidence of heterogeneity. This leads us to conduct country-by-country time-series tests to assess the lead-lag relationship among agencies. To our knowledge we are the first to do this and thereby extend the literature on herding among rating agencies' sovereign assignments. We also consider changes in the lead-lag relationship through time by splitting the sample into pre-crisis and crisis periods to assess the extent to which any herding is intentional and our results indicate some degree of heterogeneity through time. To the extent that there is herding we find that it is generally towards Standard and Poor's ratings confirming our expectations given that this agency is regarded as possessing the greatest reputational capital. However, our results do not support the expectation that Fitch is a follower for more (a leader for less) countries than Moody's.

Citation

Chen, Z., Matousek, R., Stewart, C., & Webb, R. (2019). Do rating agencies exhibit herding behaviour?: evidence from sovereign ratings. International Review of Financial Analysis, 64, 57-70. https://doi.org/10.1016/j.irfa.2019.04.011

• Journal Article Type: Article
• Acceptance Date: Apr 30, 2019
• Online Publication Date: May 5, 2019
• Publication Date: Jul 31, 2019
• Deposit Date: May 20, 2019
• Publicly Available Date: Nov 6, 2020
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 64
• Pages: 57-70
• DOI: https://doi.org/10.1016/j.irfa.2019.04.011
• Keywords: sovereign ratings; herding; cross-country heterogeneity JEL classification: C25; C52; G24 2
• Public URL: https://nottingham-repository.worktribe.com/output/2066005
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S105752191830807X
• Additional Information: This article is maintained by: Elsevier; Article Title: Do rating agencies exhibit herding behaviour? Evidence from sovereign ratings; Journal Title: International Review of Financial Analysis; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.irfa.2019.04.011; Content Type: article; Copyright: © 2019 Elsevier Inc. All rights reserved.