TY - JOUR AB - Purpose Credit market models and the microstructure theory of the ratings market suggest that information provided by credit rating agencies becomes more relevant in recessions when agency costs are high and less relevant in expansions when agency costs are low. The purpose of this paper is to empirically test these hypotheses with regard to equity markets.Design/methodology/approach The authors use business cycle identification algorithms to map rating events (credit rating changes and watchlist inclusions) to business cycle phases and apply the event study methodology. The results are backed by cross-sectional regressions using a variety of control variables.Findings The authors find that the relevance of information provided by credit rating agencies for equity prices heavily depends on the level of agency costs. Furthermore, the authors detect a “flight-to-quality” during recessions in the speculative grade segment and a weakened relevance of rating events in expansions in the investment grade segment.Originality/value This paper is the first to empirically analyse how equity investors perceive credit rating changes and watchlist inclusions over the business cycle. In the empirical analysis, the authors use a large sample of about 25,000 rating events in all Organisation for Economic Co-operation and Development markets. The presented results underline that credit ratings address the agency problem in financial markets and can thus be regarded as useful for risk management or regulation. VL - 17 IS - 2 SN - 1526-5943 DO - 10.1108/JRF-08-2015-0079 UR - https://doi.org/10.1108/JRF-08-2015-0079 AU - Fieberg Christian AU - Mertens Richard Lennart AU - Poddig Thorsten PY - 2016 Y1 - 2016/01/01 TI - The relevance of credit ratings over the business cycle T2 - The Journal of Risk Finance PB - Emerald Group Publishing Limited SP - 152 EP - 168 Y2 - 2024/03/19 ER -