The importance of conflicts of interest in attributing sovereign credit ratings

Credit rating agencies (CRAs) have been in the regulator's spotlight since the subprime crisis occurred and they remain under criticism due to suspected conflicts of interest that could arise from clients soliciting a rating. The aim of this paper is to contribute to the current discussion on regulatory failures in CRAs' activities by testing the existence of a bias in CRAs' assessment due to conflict of interest. More specifically, we examine whether the solicitation of a rating by a sovereign affects the grade provided by rating agencies. Our empirical results, which are based on a two-step ordered probit for a large set of emerging and industrialized countries, address the issue of self-selection bias for ratings attributed by Standard & Poor's in 2013 and suggest that unsolicited ratings are higher than solicited ones, which goes against the traditional argument of conflict of interest, namely the “blackmail” hypothesis, and supports the idea that CRAs attach an important weight to their reputation in attributing sovereign ratings.