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Stock Market Reaction To Anticipated Versus Surprise Rating Changes

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  • Lynnette D. Purda
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    Abstract

    I examine whether bond rating changes can be anticipated by investors and test whether the stock price reaction to the eventual change varies as a result. All else equal, the market reaction to changes that could have been easily predicted should be significantly smaller than the reaction to changes that are largely a surprise. Although rating upgrades prove difficult to predict, approximately 20% of downgrades can be correctly predicted using a relatively small number of publicly available variables. There is no significant difference between the stock price reaction to anticipated versus unanticipated rating changes. 2007 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 30 (2007)
    Issue (Month): 2 ()
    Pages: 301-320

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    Handle: RePEc:bla:jfnres:v:30:y:2007:i:2:p:301-320

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    Cited by:
    1. Daniel Roesch & Harald Scheule, 2011. "Securitization Rating Performance and Agency Incentives," Working Papers, Hong Kong Institute for Monetary Research 182011, Hong Kong Institute for Monetary Research.
    2. Paula Hill & Robert Faff, 2010. "The Market Impact of Relative Agency Activity in the Sovereign Ratings Market," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 37(9-10), pages 1309-1347, November/.
    3. Hill, Paula & Brooks, Robert & Faff, Robert, 2010. "Variations in sovereign credit quality assessments across rating agencies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(6), pages 1327-1343, June.
    4. Bannier, Christina E. & Hirsch, Christian, 2009. "The economic function of credit rating agencies: what does the watchlist tell us?," Frankfurt School - Working Paper Series 124, Frankfurt School of Finance and Management.
    5. Bannier, Christina E. & Hirsch, Christian W., 2010. "The economic function of credit rating agencies - What does the watchlist tell us?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(12), pages 3037-3049, December.
    6. Blumenstock, Hendrik & von Grone, Udo & Mehlhorn, Marc & Merkl, Johannes & Pietz, Marcus, 2012. "Einflussfaktoren von CDS-Spreads als Maß für das aktuelle Bonitätsrisiko: Liefert das Rating eine Erklärung?," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2012-03, University of Bayreuth, Chair of Finance and Banking.
    7. Chen, Jie & Hill, Paula, 2013. "The impact of diverse measures of default risk on UK stock returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 5118-5131.
    8. Imbierowicz, Björn & Wahrenburg, Mark, 2013. "Wealth transfer effects between stockholders and bondholders," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 53(1), pages 23-43.
    9. Rösch, Daniel & Scheule, Harald, 2009. "The Empirical Relation between Credit Quality, Recovery and Correlation," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-418, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    10. Pilar Abad & M. Dolores Robles, 2014. "The Risk-Return binomial after rating changes," Documentos de Trabajo del ICAE, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico 2014-23, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    11. Alissa, Walid & Bonsall, Samuel B. & Koharki, Kevin & Penn, Michael W., 2013. "Firms' use of accounting discretion to influence their credit ratings," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 55(2), pages 129-147.

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