From revenue to safety: Rating agencies have changed their concerns after the crisis

In this study, we investigate why the Big Three rating agencies, namely, Standard and Poor’s, Moody’s, and Fitch, may simultaneously assign (in)accurate ratings. We propose safety and revenue concerns as motivations to their herding behavior and empirically test them thereafter. Safety concern motivates agencies to follow the ratings of other agencies to ensure safety in a sense that if all agencies make the same errors, then no one will be blamed. Revenue concern motivates agencies to upgrade their ratings to attract customers when their ratings are lower than those of their rivals. Our results first show that safety concern is the major driver for the herding behavior. Second, motivation undergoes structural changes from a revenue concern in the pre-crisis period to safety concern during the crisis and post-crisis periods. Third, results support the safety concern even when an agency and their rival’s ratings move between investment and speculative grades.