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

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.

Corporate distress prediction in China: a machine learning approach

“…Previous literature has demonstrated that macro‐economic drivers can affect credit ratings changes including corporate bankruptcy (e.g. Keenan et al ., ; Bangia et al ., ; Duffie et al ., ; Hensher et al ., ; Koopman et al ., ; Lobo et al ., ). We use four broad macro‐economic indicators relating to the overall economic health of the Chinese economy.…”

National Culture and Corporate Rating Migrations

“…First, culture influences macro-economic activities 3 through its roles as an informal constraint and through its effects on managerial decision making (Zheng et al 2012). Ratings move pro-cyclically (Lobo et al 2017) and rating regrades are primarily affected by macro-economic conditions (Blume et al 1991). Accelerated downgrades and defaults occur more often during economic contractions while upgrades tend to 2 Contributing to this view is the evidence that the cultural differences between Greece and Germany made Greece's negotiations to avoid a default much more difficult (Guiso et al 2016).…”

“…Individualistic countries achieve a higher GNI per capita (Hofstede et al 2010, pp. 38, 263-65). outweigh downgrades during economic expansions (Bangia et al 2002;Lobo et al 2017). Rating volatility is intensified during business cycle troughs and subdued during business cycle peaks (Nickell et al 2000).…”

O uso de derivativos para hedge melhora os ratings de crédito das empresas brasileiras?

“…A partir dessa abordagem e prisma de análise, no Brasil, Damasceno et al (2008) Já Lobo et al (2017) analisaram o efeito dos ciclos dos negócios e dos mercados financeiros nas classificações de ratings emitidos pela agência S&P, entre os anos de 1986 e 2012. Em suas conclusões, os autores do estudo apontaram que os ratings de crédito são influenciados pelos ciclos dos negócios e pelos ciclos dos mercados financeiros; e, além disso, as agências atribuíram ratings de crédito mais baixos, durante os períodos de baixa nos ciclos de negócios e do mercado financeiro, e classificações mais altas durante os períodos de alta.…”

“…,Damasceno et al (2008),Johnston et al (2009), Bonsall et al (2015,Batta et al (2016) eLobo et al (2017). Assim, quanto melhor a nota da empresa menor é a escala numérica.…”