Pricing policies and customers’ portfolio concentration for rating agencies: evidence from Fitch, Moody’s and S&P

The rating agencies usually charge fees of their rating assessments on the basis of the issuer paying model. This pricing policy, however, can expose agencies to a risk of collusion, which can undermine the investors’ trust in the rating service. An analysis of the available literature highlights the lack of investigation into the economic equilibrium of the single rating agencies and of assessments relating to the weight of the revenues received from each issuer, compared to the overall business relationships. Actually regulatory constraints define a monitoring procedure based only on the turnover of customers and on year by year revenues without considering a multi-period approach that seems to be more useful for a service like rating that is characterized by strong and long-lasting relationships. The aim of this article is to investigate the relationships established by the three top rating agencies (Fitch, Moody’s and S&P) with each customer served, using the Customer Lifetime Value model, for the time horizon 1999-2008. Results show that – as expected – a significant percentage of the agencies’ revenues come from customers that require services on an ongoing basis and so, as for other business, the value of relationship is high also in the rating industry. The analysis of the characteristics of the agency-customer relationship is then completed with an assessment of the best/worst customers served, which has revealed the importance of the duration of the relationship and of the industry sector of the assessed entity in classifying the relevance of each customer. Through a study of the possible impact of differentiated pricing policies, within the range of variation declared by the agencies, the paper demonstrates that the degree of economic independence could decrease significantly if the pricing policies of services requested by best customers are more penalizing respect to those defined for others.