Effect of Business and Financial Market Cycles on Credit Ratings: Evidence from the Last Two Decades
|Speaker:||Luc Paugam, ESSEC|
|Date:||Wednesday 4 March 2015|
|Location:||Building One: Constantine Leventis|
We analyze the effect of business and financial market cycles on credit ratings using a sample of firms from the Russell 3000 index that are rated by Standard and Poor’s over the period 1986-2012. We also examine investors’ reaction to credit rating actions in different stages of business and financial market cycles. We document that credit rating agencies are influenced by business and financial market cycles. Credit rating agencies appear to be pro-cyclical, as they assign lower credit ratings during downturns of business and financial market cycles and higher ratings during upturns of business and financial market cycles. We also document stronger investor reaction to negative credit rating actions during downturns of business and financial market cycles. Our results confirm theoretical predictions and inform regulators.