Does competition improve sovereign credit rating quality?

The market for sovereign ratings has been dominated by two agencies but credible new entrants have emerged. Decreasing market concentration has potentially significant implications for the quality of sovereign ratings. Using a global dataset from S&P, Moody's, Fitch and DBRS for 2000-2016, we find that S&P and Moody's ratings are higher (lower) in periods following increases in Fitch (DBRS) market share. Evidence suggests that DBRS employs a relatively lenient rating policy to proceed in this market but increased regulatory pressure on rating agencies weakens any tendency to inflate ratings to gain market share. We also find that sovereign rating strategies vary across the economic cycle. Our findings offer wide-ranging implications for market participants, policy makers and the rating industry.