Top

The Journal of Real Estate Finance and Economics

Published in:

25-04-2019

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

Authors: Xudong An, Larry Cordell, Joseph B. Nichols

Published in: The Journal of Real Estate Finance and Economics | Issue 3/2020

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

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.

previous article The Pricing of Spatial Linkages in Companies’ Underlying Assets

next article A Tale of Two Countries: Comparing the US and Chinese Housing Markets

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Other papers include Riddiough and Zhu 2009; White 2010; Cohen 2011; Griffin and Tang 2012; Jiang et al. 2012; Griffin et al. 2013; Opp et al. 2013; and He et al. 2012; Sangiorgi and Spatt 2017.

In cases where the CRAs only started tracking the bond sometime after issuance, we impute their initial rating as the highest rating among the other CRAs that were tracking the deal from the time of issuance. We assume that the highest rating was the rating assigned by the CRAs contracted by the issuer and thus reflects the ratings at which the initial bonds were placed.

At issuance, none of the bonds should start with a “D” rating. But as discussed earlier, we only observe the rating a number of quarters after issuance for some of the bonds, and that is why we see some initial “D” ratings for some of the bonds.

For each bond, we calculate the highest initial ratings among the different CRAs.

These standards are set out in the CREFC Investor Reporting Package (http://www.crefc.org/irp).

We intend to extend the list of rating related variables to include rating duration, etc.; deal and bond issuance variables such as bond size, issuer type, rating shopping proxies, issuer-servicer relationship, deal structure complexity.

Alternatively, we tested coincident index and Treasury yield slope. Results are robust.

We also considered change in DSCR but find it to be highly correlated with change in LTV.

We believe that the counter-intuitive result is due to collinearity between the change in the average pool-level LTV and other risk factors. Simple models including only the change in the average pool-level LTV, and no other risk factors, do result in a significant and positive coefficient in the downgrade model.

Additional results, not shown, interact our CRA dummies with the lagged rating change variables. Due to degrees of freedom we cannot estimate this model with the bond specific random fixed effects. But a simpler model without the bond specific random fixed effects generates results consistent with those shown, with similar patterns in the lagged rating changes even when including CRA specific interactions.

These models include the same specification as those in Tables 5 and 6. The coefficients for the other variables are all largely consistent with those in the base models.

There is an overlap in the confidence interval for the lagged CRA rating action in the upgrade model between the pre-crisis and crisis period, suggesting that the differences in the coefficient between those regimes is not statistically significant.

Naturally yields will also vary across tranches, along with other features such as the level of realized losses that triggers the change in control to the next higher subordinated tranche.

The risk factors have been reduced to include only the macro factors that are available for both the CMBS and corporate bonds. We have excluded Moody’s from this sample, as we lack Moody’s rating for corporate bonds that overlap with bonds ratings by S&P and Fitch.

Afonso, A., Gomes, P., & Rother, P. (2009). Ordered response models for sovereign debt ratings. Applied Economics Letters, 16, 769–773.CrossRef

Alsakka, R., & Ap, G. O. (2010). The Extent and Causes of Sovereign Split Ratings. SSRN Working Paper.

Banerjee, A. (1992). A simple model of herd behavior. Quarterly Journal of Economics, 107, 797–817.CrossRef

Choi, N., & Sias, R. W. (2009). Institutional industry herding. Journal of Financial Economics, 94, 469–491.CrossRef

Cohen, A. (2011). Rating shopping in the CMBS market. Fed working paper.

Devenow, A., & Welch, I. (1996). Rational herding in financial economics. European Economic Review, 40, 603–615.CrossRef

Greene, W. H. (2003). Econometric analysis (5th ed.). Upper Saddle River: Prentice Hall.

Griffin, J., & Tang, D. Y. (2012). Did subjectivity play a role in CDO credit ratings. Journal of Finance, 67(4), 1293–1328.CrossRef

Griffin, J., Nickerson, J., & Tang, D. Y. (2013). Rating shopping or catering? An examination of the response to competitive pressure for CDO credit ratings. Review of Financial Studies, 26(9), 2270–2310.CrossRef

Grinblatt, M., Titman, S., & Wermers, R. (1995). Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior. American Economic Review, 85, 1088–1105.

He, J., Qian J., & Strahan, P. H. (2012). Are all ratings created equal? The impact of issuer size on the pricing of mortgage-backed securities. Journal of Finance, 67(6), 2097-2137.

Jiang, J., Stanford, M. H., & Xie, Y. (2012). Does it matter who pays for bond ratings? Historical evidence. Journal of Financial Economics, 105, 607–621.CrossRef

Lugo, S., Croce, A., & Faff, R. (2015). Herding behavior and rating convergence among credit rating agencies: Evidence from the subprime crisis. Review of Finance, 19, 1703–1731.CrossRef

Morris, S., & Shin, H. S. (2002). Social value of public information. American Economic Review, 22(5), 1521–1534.CrossRef

Opp, C. C., Opp, M. M. & Harris, M. (2013). Rating agencies in the face of regulation. Journal of Financial Economics, 108, 64-81.

Riddiough, T., & Zhu, J. (2009). Shopping, relationships, and influence in the market for credit ratings. Mimeo: University of Wisconsin Madison.

Sangiorgi, F., & Spatt, C. S. (2017). The economics of credit rating agencies. SSRN working paper.

Scharfstein, D., & Stein, J. (1990). Herd behavior and investment. American Economic Review, 80, 465–479.

Shiller, R. J. (1995). Conversation, information and herd behavior. American Economic Review, 85(2), 181–185.

Skreta, V., & Veldkamp, L. (2009). Ratings shopping and asset complexity. A theory of ratings inflation. Journal of Monetary Economics, 56, 678–695.CrossRef

Stanton, R., & Wallace, N. (2017). CMBS subordination, ratings inflation, and regulatory-capital arbitrage. Financial Management, 47(1).

Tukey, J. W. (1991). 1991. The philosophy of multiple comparisons. Statistical Science, 6(1), 100–116.CrossRef

Welch, I. (2000). Herding among security analysts. Journal of Financial Economics, 58, 369–396.CrossRef

White, L. J. (2010). Markets: The credit rating agencies. Journal of Economic Perspectives, 24(2), 211-26.

Title: Reputation, Information, and Herding in Credit Ratings: Evidence from CMBS
Authors: Xudong An
Larry Cordell
Joseph B. Nichols
Publication date: 25-04-2019
Publisher: Springer US
Published in: The Journal of Real Estate Finance and Economics / Issue 3/2020
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-019-09701-3

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 3/2020

A Tale of Two Countries: Comparing the US and Chinese Housing Markets

Is Financial Regulation Good or Bad for Real Estate Companies? – An Event Study

Investors’ Limited Attention: Evidence from REITs

2016–2017 Real Estate Finance & Investment Symposium

The Pricing of Spatial Linkages in Companies’ Underlying Assets

Corporate Diversification and the Cost of Debt