One size does not fit all: The value of information and coexistence of rating agencies

This study investigates the production of information by multiple rating agencies and the selection of rating agencies when the value of information to buyers is heterogeneous. We argue that firms strategically choose a rating agency based on the value of information. Not only can a rating agency with a finer rating scheme than a dominant agency offer information to the market, but an agency with a coarser scheme can also provide information by serving low-information-value users and sellers who could not obtain a rating otherwise. This does not necessarily result in rating shopping. We tested these hypotheses using the U.S. property-casualty insurance market, examining insurers' rating agency selections among AM Best, Demotech, and S&P. Our results indicate that the value of information to users influences both the design of rating schemes by rating agencies and the selection of rating agencies by firms. The coexistence of multiple rating agencies with different rating schemes suggests their ability to serve heterogeneous information clienteles.