Competition in the Credit Rating Industry: How Competition between Rating Agencies affects Rating Quality

Abstract: Higher levels of competition between credit rating agencies on an industry-year level have previously been shown to decrease the rating quality of incumbent firm credit ratings after specific changes in the credit rating industry. We successfully replicate this research and extend it empirically, finding no evidence that this correlation holds for the time period 2010-2016. Specifically, we look at how the rating quality of long-term firm credit ratings issued by Standard & Poor's is affected by competition quantified in two ways, Fitch Ratings market share and the Hirschman-Herfindahl Index. We conclude that our results indicate a positive trend towards more informative firm ratings of higher quality, as the level of competition does not have a significant impact on rating level and informativeness.