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The information content of Australian credit ratings: A comparison between subscription and non-subscription-based credit rating agencies

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  • Chan, Pak To
  • Edwards, Vic
  • Walter, Terry

Abstract

We classify credit rating agencies into two groups: subscribing and non-subscribing. Investors can access (non-subscribing) credit reports released to the public for no charge, or investors can subscribe to the fee-paying (subscribing) credit reports from agencies. Our results suggest that the information content of non-subscribing credit agencies is very low, whereas positive excess returns exist up to eight months after the announcement of credit upgrades from the subscription-only agencies. We support the hypothesis proposed in Grossman and Stiglitz [Grossman, S.J., Stiglitz, J.E., 1976. Information and competitive price systems. The American Economic Review 66, 246-253; Grossman, S.J., Stiglitz, J.E., 1980. On the impossibility of informationally efficient markets. The American Economic Review 70, 393-408]. Investors who spend resources on information acquisition should receive compensation for their information advantage, or there would be no incentive for such activity.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 33 (2009)
Issue (Month): 1 (March)
Pages: 22-44

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Handle: RePEc:eee:ecosys:v:33:y:2009:i:1:p:22-44

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Keywords: Credit rating Event studies Market efficiency;

References

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  1. Brown, Philip & Keim, Donald B. & Kleidon, Allan W. & Marsh, Terry A., 1983. "Stock return seasonalities and the tax-loss selling hypothesis : Analysis of the arguments and Australian evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 105-127, June.
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  5. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
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  12. 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.
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  14. Hsueh, L. Paul & Liu, Y. Angela, 1992. "Market anticipation and the effect of bond rating changes on common stock prices," Journal of Business Research, Elsevier, vol. 24(3), pages 225-239, May.
  15. Zaima, Janis K & McCarthy, Joseph E, 1988. "The Impact of Bond Rating Changes on Common Stocks and Bonds: Tests of the Wealth Redistribution Hypothesis," The Financial Review, Eastern Finance Association, vol. 23(4), pages 483-98, November.
  16. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
  17. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
  18. Griffin, Paul A & Sanvicente, Antonio Z, 1982. " Common Stock Returns and Rating Changes: A Methodological Comparison," Journal of Finance, American Finance Association, vol. 37(1), pages 103-19, March.
  19. Akhigbe, Aigbe & Madura, Jeff & Whyte, Ann Marie, 1997. "Intra-industry Effects of Bond Rating Adjustments," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 20(4), pages 545-61, Winter.
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