Reputation, Information, and Herding in Credit Ratings: Evidence from CMBS

We find strong evidence of herding behavior among credit rating agencies (CRAs) in the CMBS market. CRAs are more likely to change their rating if another CRA had changed its rating on the same bond in the previous period. CRAs tend to adjust their ratings to make them converge with those of other CRAs when there is rating disagreement in the previous period. CRA reduced their herding behavior during the financial crisis and herding after the crisis was still lower than it was pre-crisis. We also find evidence that herding in corporate bonds is largely limited to below-investment grade companies. In contrast, we see evidence of herding in CMBS in both high and low rated tranches. These results are consistent with predictions from a theoretical model where CRAs use both public and private information in determining their credit ratings.