The Effect of Business and Financial Market Cycles on Credit Ratings: Evidence from the Last Two Decades

Abacus, Forthcoming

52 Pages Posted: 24 Nov 2015

See all articles by Gerald J. Lobo

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Luc Paugam

HEC Paris, Accounting and Management Control Department

Hervé Stolowy

HEC Paris - Accounting and Management Control Department

Pierre Astolfi

University Paris-Est Créteil (UPEC)

Multiple version iconThere are 2 versions of this paper

Date Written: November 12, 2015

Abstract

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 investor 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; they assign lower credit ratings during downturns of business and financial market cycles and higher ratings during upturns. Our study is the first to find strong evidence of pro-cyclicality in credit ratings using a long window. We also document stronger investor reaction to negative credit rating actions during downturns. Our results confirm theoretical predictions and inform regulators.

Keywords: Credit rating agencies, Business cycles, Financial market cycles, Investor reaction, Credit rating quality

JEL Classification: E32, G14, M41

Suggested Citation

Lobo, Gerald J. and Paugam, Luc and Stolowy, Hervé and Astolfi, Pierre, The Effect of Business and Financial Market Cycles on Credit Ratings: Evidence from the Last Two Decades (November 12, 2015). Abacus, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2694461

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Luc Paugam (Contact Author)

HEC Paris, Accounting and Management Control Department ( email )

1 avenue de la libération
Jouy-en-Josas, 78350
France

Hervé Stolowy

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France
+33 1 39 67 94 42 (Phone)
+33 1 39 67 70 86 (Fax)

HOME PAGE: http://www.hec.fr/stolowy

Pierre Astolfi

University Paris-Est Créteil (UPEC) ( email )

61 avenue du General de Gaulle
Creteil cedex, 94010
France

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