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Procyclical ratings and market reactions

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  • Kemper, Kristopher J.
  • Mortenson, Kristian

Abstract

We investigate stock price reactions to credit rating changes during competing economic environments. Prior research has shown that credit rating assignments differ during times of economic expansion and economic contraction. We investigate if equity prices adjust differently to changes in credit quality in different economic environments. Our results show that markets react more strongly to negative ratings news during times of economic contraction. When the economy is expanding, markets also overreact by pushing prices higher than they otherwise would during an economic downturn.

Suggested Citation

  • Kemper, Kristopher J. & Mortenson, Kristian, 2020. "Procyclical ratings and market reactions," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:ecofin:v:51:y:2020:i:c:s1062940818301372
    DOI: 10.1016/j.najef.2018.08.013
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    References listed on IDEAS

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    Cited by:

    1. Ahmad, Wasim & Kutan, Ali M. & Chahal, Rishman Jot Kaur & Kattumuri, Ruth, 2021. "COVID-19 Pandemic and firm-level dynamics in the USA, UK, Europe, and Japan," International Review of Financial Analysis, Elsevier, vol. 78(C).
    2. Alanis, Emmanuel, 2020. "Is there valuable private information in credit ratings?," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Credit ratings; Business cycles; Event studies;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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