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Credit rating changes’ impact on banks: evidence from the US banking industry

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  • Apergis, Nicholas
  • Payne, James E.
  • Tsoumas, Chris

Abstract

This study examines the impact of credit rating upgrades and downgrades on six comprehensive banks’ asset classes, profitability, leverage and size using data from the Federal Deposit Insurance Corporation’s call reports and Bloomberg over the period 1989-2008. In summary, the results suggest that a downgrade has a lasting and relatively more severe impact on banks than an upgrade; however, downgraded banks do not seem to effectively reduce their appetite for risk over a longer horizon. It seems that the role of credit rating agencies as an integral part of banks’ prudential supervision through market discipline is, in a longer horizon, overstated.

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File URL: http://mpra.ub.uni-muenchen.de/35647/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35647.

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Date of creation: Dec 2011
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Handle: RePEc:pra:mprapa:35647

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Keywords: Credit rating changes; banks; market discipline;

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  1. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(2-3), pages 187-243, May.
  2. Brooks, Robert & Faff, Robert W. & Hillier, David & Hillier, Joseph, 2004. "The national market impact of sovereign rating changes," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(1), pages 233-250, January.
  3. Jorion, Philippe & Liu, Zhu & Shi, Charles, 2005. "Informational effects of regulation FD: evidence from rating agencies," Journal of Financial Economics, Elsevier, Elsevier, vol. 76(2), pages 309-330, May.
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  5. Billett, Matthew T. & Garfinkel, Jon A. & O'Neal, Edward S., 1998. "The cost of market versus regulatory discipline in banking," Journal of Financial Economics, Elsevier, Elsevier, vol. 48(3), pages 333-358, June.
  6. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  7. Kisgen, Darren J., 2009. "Do Firms Target Credit Ratings or Leverage Levels?," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 44(06), pages 1323-1344, December.
  8. Ederington, Louis H. & Goh, Jeremy C., 1998. "Bond Rating Agencies and Stock Analysts: Who Knows What When?," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 33(04), pages 569-585, December.
  9. Gonzalez, F. & Haas, F. & Johannes, R. & Persson, M. & Toledo, L. & Violi, R. & Zins, C. & Wieland, M., 2004. "Market dynamics associated with credit ratings: a literature review," Financial Stability Review, Banque de France, Banque de France, issue 4, pages 53-76, June.
  10. Darren J. Kisgen, 2006. "Credit Ratings and Capital Structure," Journal of Finance, American Finance Association, American Finance Association, vol. 61(3), pages 1035-1072, 06.
  11. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 733-52, June.
  12. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, American Economic Association, vol. 92(4), pages 874-888, September.
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