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

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.