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The Impact of Bond Rating Changes on Common Stocks and Bonds: Tests of the Wealth Redistribution Hypothesis

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  • Zaima, Janis K
  • McCarthy, Joseph E

Abstract

Past studies on the impact of bond rating changes have focused on bonds or stocks and the information content of rating change announcements. This paper examines both bonds and stocks, and investigates the wealth redistribution effect as well as the existence of information content. The results imply that information content of "bad" news dominates firm downgradings, while the wealth redistribution effect dominates firm upgradings. Furthermore, this study attributes the lack of information content for bond upgradings to the offsetting effects of wealth redistribution and information content. Copyright 1988 by MIT Press.

Suggested Citation

  • 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 483-498, November.
  • Handle: RePEc:bla:finrev:v:23:y:1988:i:4:p:483-98
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    Cited by:

    1. Pilar Abad-Romero & M. Dolores Robles-Fernandez, 2006. "Risk and Return Around Bond Rating Changes: New Evidence From the Spanish Stock Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 885-908.
    2. Brooks, Robert & Faff, Robert W. & Hillier, David & Hillier, Joseph, 2004. "The national market impact of sovereign rating changes," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 233-250, January.
    3. Seung Han & Yoon Shin & Walter Reinhart & William Moore, 2009. "Market Segmentation Effects in Corporate Credit Rating Changes: The Case of Emerging Markets," Journal of Financial Services Research, Springer;Western Finance Association, vol. 35(2), pages 141-166, April.
    4. Aigbe Akhigbe & Jeff Madura & Ann Marie Whyte, 1997. "Intra-Industry Effects Of Bond Rating Adjustments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(4), pages 545-561, December.
    5. Abad, Pilar & Robles, M. Dolores, 2014. "Credit rating agencies and idiosyncratic risk: Is there a linkage? Evidence from the Spanish Market," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 152-171.
    6. Uma V. Sridharan & Lori Dickes & W. Royce Caines, 2002. "The Social Impact of Business Failure: Enron," American Journal of Business, Emerald Group Publishing, vol. 17(2), pages 11-22.
    7. María Concepción Verona Martel & José Juan Déniz Mayor, 2011. "Las agencias de rating y la crisis fi nanciera de 2008: ¿El fi n de un poder sin control?," REVISTA CRITERIO LIBRE, UNIVERSIDAD LIBRE - SEDE PRINCIPAL, June.
    8. Martin Halek & David L. Eckles, 2010. "Effects of Analysts' Ratings on Insurer Stock Returns: Evidence of Asymmetric Responses," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 801-827.
    9. Ferreira, Miguel A. & Gama, Paulo M., 2007. "Does sovereign debt ratings news spill over to international stock markets?," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3162-3182, October.
    10. Ferri, Giovanni & Lacitignola, Punziana & Lee, Jeong Yeon, 2013. "Foreign ownership and the credibility of national rating agencies: Evidence from Korea," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 762-776.
    11. Kim, Yongtae & Nabar, Sandeep, 2007. "Bankruptcy probability changes and the differential informativeness of bond upgrades and downgrades," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3843-3861, December.
    12. Rubina Shaheen & Attiya Yasmin Javid, 2014. "Effect of Credit Rating on Firm Performance and Stock Return; Evidence form KSE Listed Firms," PIDE-Working Papers 2014:104, Pakistan Institute of Development Economics.
    13. Li, Huimin & Jeon, Bang Nam & Cho, Seong-Yeon & Chiang, Thomas C., 2008. "The impact of sovereign rating changes and financial contagion on stock market returns: Evidence from five Asian countries," Global Finance Journal, Elsevier, vol. 19(1), pages 46-55.
    14. Chan, Pak To & Edwards, Vic & Walter, Terry, 2009. "The information content of Australian credit ratings: A comparison between subscription and non-subscription-based credit rating agencies," Economic Systems, Elsevier, vol. 33(1), pages 22-44, March.
    15. Imbierowicz, Björn & Wahrenburg, Mark, 2013. "Wealth transfer effects between stockholders and bondholders," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 23-43.
    16. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February.
    17. Kwon, Yonghyun & Han, Seung Hun & Lee, Bong-Soo, 2016. "Financial constraints and negative spillovers in business groups: Evidence from Korea," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 84-100.
    18. Bremer, Marc & Pettway, Richard H., 2002. "Information and the market's perceptions of Japanese bank risk: Regulation, environment, and disclosure," Pacific-Basin Finance Journal, Elsevier, vol. 10(2), pages 119-139, April.
    19. Byoun, Soku, 2014. "Information content of unsolicited credit ratings and incentives of rating agencies: A theory," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 338-349.
    20. Bissoondoyal-Bheenick, Emawtee, 2004. "Rating timing differences between the two leading agencies: Standard and Poor's and Moody's," Emerging Markets Review, Elsevier, vol. 5(3), pages 361-378, September.

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