Procyclical ratings and market reactions

Kristopher J. Kemper and Kristian Mortenson

The North American Journal of Economics and Finance, 2020, vol. 51, issue C

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.

Keywords: Credit ratings; Business cycles; Event studies (search for similar items in EconPapers)
JEL-codes: E32 G14 G24 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:51:y:2020:i:c:s1062940818301372

DOI: 10.1016/j.najef.2018.08.013

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