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Credit rating agencies during credit crunch

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  • Ali Ebrahim Nejad
  • Saeid Hoseinzade
  • Ali Niazi

Abstract

In this paper, we study whether credit rating agencies (CRAs), as they claim, follow the rating through‐the‐cycle approach as opposed to a pro‐cyclical approach. In particular, we compare the behavior of CRAs during the credit crunch and normal market conditions. Using the credit rating data by S&P, we find that CRAs assign lower credit ratings to firms during credit crunch relative to normal times. Nevertheless, this result does not necessarily imply that CRAs show an excessively pro‐cyclical behavior if credit crunches have a long‐term fundamental impact on firms. Our further investigation reveals that downgrades during a credit crunch will not be reversed over the subsequent 1–5 years, which supports through‐the‐cycle credit rating.

Suggested Citation

  • Ali Ebrahim Nejad & Saeid Hoseinzade & Ali Niazi, 2024. "Credit rating agencies during credit crunch," Review of Financial Economics, John Wiley & Sons, vol. 42(2), pages 124-147, April.
    • Handle: RePEc:wly:revfec:v:42:y:2024:i:2:p:124-147
    DOI: 10.1002/rfe.1192
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