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Information Transfer Effects of Bond Rating Downgrades

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  • Philippe Jorion
  • Gaiyan Zhang

Abstract

This paper investigates information transfer effects of bond rating downgrades measured by equity abnormal returns for industry portfolios. Industry rivals can be subject to two opposing effects, the contagion effect and the competition effect. We find that the net effect is strongly dependent on the original bond rating of the downgraded firm. For investment‐grade (speculative‐grade) firms, industry abnormal equity returns are negative (positive), which implies a predominant contagion (competition) effect. The analysis reveals a rich pattern of positive and negative correlations across negative credit events, which can be used to improve our understanding of portfolio credit risk models.

Suggested Citation

  • Philippe Jorion & Gaiyan Zhang, 2010. "Information Transfer Effects of Bond Rating Downgrades," The Financial Review, Eastern Finance Association, vol. 45(3), pages 683-706, August.
  • Handle: RePEc:bla:finrev:v:45:y:2010:i:3:p:683-706
    DOI: 10.1111/j.1540-6288.2010.00266.x
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    Cited by:

    1. Nguyen, Thu Ha & Lan, Yihui & Treepongkaruna, Sirimon & Zhong, Rui, 2023. "Credit rating downgrades and stock price crash risk: International evidence," Finance Research Letters, Elsevier, vol. 55(PB).
    2. Chang, Jung-Hsien & Hung, Mao-Wei & Tsai, Feng-Tse, 2015. "Credit contagion and competitive effects of bond rating downgrades along the supply chain," Finance Research Letters, Elsevier, vol. 15(C), pages 232-238.
    3. Fang Chen & Jian Huang & Han Yu, 2020. "The intra-industry effects of proxy contests," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(2), pages 321-347, April.
    4. Ann Marie Hibbert & Ivelina Pavlova & Joel Barber & Krishnan Dandapani, 2011. "Credit Spread Changes and Equity Volatility: Evidence from Daily Data," The Financial Review, Eastern Finance Association, vol. 46(3), pages 357-383, August.
    5. Körner, Finn Marten & Trautwein, Hans-Michael, 2015. "Sovereign credit ratings and the transnationalization of finance: Evidence from a gravity model of portfolio investment," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-54.
    6. Xiaolu Hu & Haoyi Luo & Zijin Xu & Jiang Li, 2021. "Intra‐industry spill‐over effect of default: Evidence from the Chinese bond market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4703-4740, September.
    7. Qian, Qian & Feng, Hairong & Gu, Jing, 2021. "The influence of risk attitude on credit risk contagion—Perspective of information dissemination," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 582(C).
    8. Valeriya Dinger & Vlad Marincas & Francesco Vallascas, 2018. "Systemic Effects of Bank Equity Issues: Competition, Stabilization and Contagion," Working Papers 111, Institute of Empirical Economic Research, Osnabrueck University.
    9. Areski Cousin & Diana Dorobantu & Didier Rullière, 2013. "An extension of Davis and Lo's contagion model," Quantitative Finance, Taylor & Francis Journals, vol. 13(3), pages 407-420, February.
    10. Abad, Pilar & Ferreras, Rodrigo & Robles, M-Dolores, 2019. "Informational role of rating revisions after reputational events and regulation reforms," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 91-103.
    11. Denis Yongmin Joe & Frederick Dongchuhl Oh, 2018. "Spillover Effects Within Business Groups: The Case of Korean Chaebols," Management Science, INFORMS, vol. 64(3), pages 1396-1412, March.
    12. Hu, Haoshen & Kaspereit, Thomas & Prokop, Jörg, 2016. "The information content of issuer rating changes: Evidence for the G7 stock markets," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 99-108.
    13. 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).
    14. Yuriy Zabolotnyuk, 2018. "Wealth Effects of Bond Rating Announcements," Multinational Finance Journal, Multinational Finance Journal, vol. 22(3-4), pages 211-254, September.
    15. Zhu, Hui, 2014. "Implications of limited investor attention to customer–supplier information transfers," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(3), pages 405-416.
    16. Gaurav Dawar & Shivangi Bhatia & Jai Parkash Bindal, 2023. "Does Credit Rating Revisions Affect the Price of Common Stock: A Study of Indian Capital Market," Business Perspectives and Research, , vol. 11(2), pages 190-209, May.
    17. Qian, Qian & Yang, Yang & Gu, Jing & Feng, Hairong, 2019. "Information authenticity, spreading willingness and credit risk contagion – A dual-layer network perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    18. Ballester, Laura & González-Urteaga, Ana, 2021. "Do sovereign ratings cause instability in cross-border emerging CDS markets?," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 643-663.
    19. Finnerty, John D. & Miller, Cameron D. & Chen, Ren-Raw, 2013. "The impact of credit rating announcements on credit default swap spreads," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2011-2030.
    20. Luís M.S. Coelho & Ruben M.T. Peixinho & Siri Terjensen, 2011. "The intraindustry effects of going concern audit reports," CEFAGE-UE Working Papers 2011_23, University of Evora, CEFAGE-UE (Portugal).
    21. Abad, Pilar & Alsakka, Rasha & ap Gwilym, Owain, 2018. "The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 40-57.
    22. Valeriya Dinger & Vlad Marincas & Francesco Vallascas, 2018. "Systemic Effects of Bank Equity Issues: Competition, Stabilization and Contagion," IEER Working Papers 111, Institute of Empirical Economic Research, Osnabrueck University.
    23. Luís M. S. Coelho & Rúben M. T. Peixinho & Siri Terjensen, 2012. "Going concern opinions are not bad news: Evidence from industry rivals," Working Papers Department of Economics 2012/16, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    24. Ryan, Patricia A. & Villupuram, Sriram V. & Zygo, Jeffrey G., 2017. "The value of credit rating changes across economic cycles," Journal of Economics and Business, Elsevier, vol. 92(C), pages 1-9.
    25. Houssam Bouzgarrou & Tarek Chebbi, 2016. "The reaction of sovereign CDS spread volatilities to news announcements," Journal of Asset Management, Palgrave Macmillan, vol. 17(5), pages 347-360, September.

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