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Do rating agencies' decisions impact stock risks? Evidence from European markets

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  • Jérôme Hubler
  • Christine Louargant
  • Jean-Noël Ory
  • Philippe Raimbourg

Abstract

This article analyses the effect of rating agencies' decisions on stock risks for European issuers concerning five kinds of events. Our approach is an extension of dummy variable regression event study methodology, using a GARCH(1,1) estimation to capture simultaneously the impact on both systematic and specific stock risks. This new methodology allows us to obtain both global results by categories of rating decisions and individual results, event by event. We document, globally, a positive impact of upgrading on systematic risk, a negative impact of rating confirmation on specific risk, and no significant impact in all other cases. Regarding event-by-event results, the proportion of rating actions exhibiting a significant effect on risk is almost always observed between 20% and 30%. The weak evidence of a global effect on systematic risk may be due to the lack of informational content of the rating decisions on the stocks' risk, or the existence of rebalancing effects between systematic and idiosyncratic risks. Furthermore, it should be noticed that the decline in volatility in case of a rating affirmed is an insight of the certification role played by the agencies.

Suggested Citation

  • Jérôme Hubler & Christine Louargant & Jean-Noël Ory & Philippe Raimbourg, 2014. "Do rating agencies' decisions impact stock risks? Evidence from European markets," The European Journal of Finance, Taylor & Francis Journals, vol. 20(11), pages 1008-1036, November.
    • Handle: RePEc:taf:eurjfi:v:20:y:2014:i:11:p:1008-1036
    DOI: 10.1080/1351847X.2013.815125
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    Cited by:

    1. Turki Rashed Alshammari & Jean-Noël Ory, 2023. "The Impact of Religious Announcements on Stock Prices and Investment Decisions on the Saudi Stock Exchange," Post-Print hal-04105704, HAL.
    2. Abad, P. & Ferreras, R. & Robles, M.D., 2020. "Intra-industry transfer effects of credit risk news: Rated versus unrated rivals," The British Accounting Review, Elsevier, vol. 52(1).

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