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The Effect of Bond Rating Changes and New Ratings on UK Stock Returns

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  • M.J. Barron

    (ISMA Centre, University of Reading,)

  • A.D. Clare

    (ISMA Centre, University of Reading,)

  • S.H. Thomas
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    Abstract

    This is the first study to use daily data from a major capital market outside of the US to examine the role of corporate bond and commercial paper rating changes on common stock returns. Using data published by Standard and Poors' credit rating agency between 1984 and 1992, we examine the impact of new credit ratings, credit rating changes and Credit Watch announcements on UK common stock returns. We find significant negative excess returns around the date of a downgrade and positive returns close to the date of a positive CreditWatch announcement. Hence, the financial markets would appear to place some importance on rating agency pronouncements in the UK. New ratings, whether short or long-term, have no significant impact on returns. We also attempt to quantify the impact of a new credit rating upon firm cost of capital through measures of conditional volatility and systematic risk. However, we find only weak evidence to suggest that a stock's cost of capital is reduced after a long-term credit rating is awarded for the first time. Copyright Blackwell Publishers Ltd 1997.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 24 (1997-04)
    Issue (Month): 3 ()
    Pages: 497-509

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    Handle: RePEc:bla:jbfnac:v:24:y:1997-04:i:3:p:497-509

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    Cited by:
    1. Mendoza-Velázquez, Alfonso, 2009. "The information content and redistribution effects of state and municipal rating changes in Mexico," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(38), pages 1-21.
    2. Brooks, Robert & Faff, Robert W. & Hillier, David & Hillier, Joseph, 2004. "The national market impact of sovereign rating changes," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 233-250, January.
    3. Chan, Pak To & Edwards, Vic & Walter, Terry, 2009. "The information content of Australian credit ratings: A comparison between subscription and non-subscription-based credit rating agencies," Economic Systems, Elsevier, vol. 33(1), pages 22-44, March.
    4. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February.
    5. Mendoza-Velázquez, Alfonso, 2009. "The Information Content and Redistribution Effects of State and Municipal Rating Changes in Mexico," Economics Discussion Papers 2009-17, Kiel Institute for the World Economy.
    6. Pilar Abad & M. Dolores Robles, 2014. "The Risk-Return binomial after rating changes," Documentos de Trabajo del ICAE 2014-23, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    7. Finnerty, John D. & Miller, Cameron D. & Chen, Ren-Raw, 2013. "The impact of credit rating announcements on credit default swap spreads," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2011-2030.
    8. Pilar Abad-Romero & M. Robles-Fernández, 2007. "Bond rating changes and stock returns: evidence from the Spanish stock market," Spanish Economic Review, Springer, Springer, vol. 9(2), pages 79-103, June.
    9. Hill, Paula & Brooks, Robert & Faff, Robert, 2010. "Variations in sovereign credit quality assessments across rating agencies," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1327-1343, June.
    10. Maxime Merli & Alain Schatt, 2003. "Contagion effects of successive bond rating downgrades," Working Papers of LaRGE Research Center 2003-02, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    11. Maxime Merli & Alain Schatt, 2007. "Are there contagion or competition effects for non rated firms?The case of successive bond rating downgrades of Alcatel," Working Papers CREGO, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations 1070603, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    12. Ting-Kai Chou, 2013. "Information content of credit ratings in pricing of future earnings," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 40(2), pages 217-250, February.

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