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Ratings, Commercial Paper, and Equity Returns

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  • Nayar, Nandkumar
  • Rozeff, Michael S
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    Abstract

    The authors present the first evidence that initial ratings of commercial paper influence common stock returns. Highly rated industrial issues of commercial paper, unaccompanied by bank letters of credit, are associated with significantly positive abnormal returns; lower-rated issues are not. The stock price effects of changes in commercial paper ratings also demonstrate the relevance of ratings to the financing of firms. Rating downgrades, especially those that imply an exit from the commercial paper market, produce significantly negative abnormal returns; upgrades have no effects. Initial commercial paper ratings and subsequent reratings appear to help investors sort firms by their future prospects. Copyright 1994 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 49 (1994)
    Issue (Month): 4 (September)
    Pages: 1431-49

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    Handle: RePEc:bla:jfinan:v:49:y:1994:i:4:p:1431-49

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    Cited by:
    1. Harper, Joel T. & Wingender, John R., 2000. "An empirical test of agency cost reduction using interest rate swaps," Journal of Banking & Finance, Elsevier, vol. 24(9), pages 1419-1431, September.
    2. Ting-Kai Chou, 2013. "Information content of credit ratings in pricing of future earnings," Review of Quantitative Finance and Accounting, Springer, vol. 40(2), pages 217-250, February.
    3. Pilar Abad Romero & Mª Dolores Robles Fernández, 2003. "Contenido informativo de los cambios de Rating en el mercado de Valores Español," Documentos del Instituto Complutense de Análisis Económico 0304, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
    4. Goh, Jeremy C. & Ederington, Louis H., 1999. "Cross-sectional variation in the stock market reaction to bond rating changes," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(1), pages 101-112.
    5. Poon, Winnie P.H. & Chan, Kam C., 2008. "An empirical examination of the informational content of credit ratings in China," Journal of Business Research, Elsevier, vol. 61(7), pages 790-797, July.

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