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Informational content of corporate ratings in a developing country: the case of Brazilian firms

Author

Listed:
  • Rosemarie Bröker Bone

    () (Universidade Federal do Rio de Janeiro)

  • Eduardo P Ribeiro

    () (Universidade Federal do Rio de Janeiro and CADE)

Abstract

A corporate rating is an opinion from a rating agency about the debt payment capacity and willingness to pay of a private issuer. In principle, ratings issued by a third party should be unbiased and provide private information on credit quality to the market. Yet many researchers argue that such ratings only reflect market information. The aim of this article is to evaluate the informational content of foreign currency non-bank corporate credit ratings in Brazil. This is an interesting case as an emerging economy with short rating experience. We employ two complementary methodologies. First, an ordered probit model on credit rating using firm level information is estimated to predict firm ratings. Second, an event study is conducted to assess the effect of credit rating changes on abnormal firm returns. If ratings do not carry new information, they should be predictable and should not generate abnormal returns. Our estimates suggest that (i) ratings are not easily predicted using firm data, although they seem very sensitive to aggregate economic changes; (ii) the rating changes do not influence firm stock returns.

Suggested Citation

  • Rosemarie Bröker Bone & Eduardo P Ribeiro, 2013. "Informational content of corporate ratings in a developing country: the case of Brazilian firms," Economics Bulletin, AccessEcon, vol. 33(1), pages 35-45.
  • Handle: RePEc:ebl:ecbull:eb-12-00679
    as

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    References listed on IDEAS

    as
    1. Pilar Abad-Romero & M. Robles-Fernández, 2007. "Bond rating changes and stock returns: evidence from the Spanish stock market," Spanish Economic Review, Springer;Spanish Economic Association, vol. 9(2), pages 79-103, June.
    2. Impson, C Michael & Karafiath, Imre & Glascock, John L, 1992. "Testing Beta Stationarity across Bond Rating Changes," The Financial Review, Eastern Finance Association, vol. 27(4), pages 607-618, November.
    3. Kamstra, Mark & Kennedy, Peter & Suan, Teck-Kin, 2001. "Combining Bond Rating Forecasts Using Logit," The Financial Review, Eastern Finance Association, vol. 36(2), pages 75-96, May.
    4. Giovanni Ferri & Li-Gang Liu, 2003. "How Do Global Credit-Rating Agencies Rate Firms from Developing Countries?," Asian Economic Papers, MIT Press, vol. 2(3), pages 30-56.
    5. G. Ferri & L.-G. Liu & J. E. Stiglitz, 1999. "The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 335-355, November.
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    More about this item

    Keywords

    corporate ratings; Brazil; event study.;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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