Are credit ratings procyclical?
Author InfoC. H. Furfine Jeffery D. Amato (Goldman Sachs International) Abstract This paper studies the influence of the state of the business cycle on credit ratings. In particular, we assess whether rating agencies are excessively procyclical in their assignment of ratings. Our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms, in addition to indicators of macroeconomic conditions. Utilising annual data on all US firms rated by Standard&Poor’s, we find little evidence of procyclicality in ratings. By contrast, we find that initial ratings and rating changes exhibit excess sensitivity to the business cycle. The paper offers two explanations of these results. Download InfoTo download: If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the
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