The Risk–Return Binomial After Rating Changes

type="main" xml:lang="en"> Risk-averse investors consider the risk–return trade-off when determining their new position after the release of relevant information. This paper analyses the informational content of rating change announcements, focusing on the joint effect they have on the risk–return binomial. Our purpose is to identify the main factors that signal which announcements are informative. To do so, we estimate a binomial logit model for the probability that credit rating announcements contain informational content. We analyse a sample of rating events affecting Spanish listed firms from 2000 to 2010. The empirical results reveal significant differences in informational content between positive and negative rating events. For both types of announcements, we observe higher informational content when agencies agree on the new level of solvency, whereas announcements regarding highly covered firms that operate in highly regulated sectors are less informative. Other factors such as the presence of previous rating refinements or trends in credit quality reveal different information depending on the direction of the rating event. Finally, we find that announcements after the crisis disclose less information, suggesting a loss of reputation among credit rating agencies.