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Do upgrades matter? Evidence from trading volume

Author

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  • Brogaard, Jonathan
  • Koski, Jennifer L.
  • Siegel, Andrew F.

Abstract

Prior researchers document no significant abnormal returns around upgrades of credit ratings, suggesting upgrades convey no new information. These studies are limited by lack of data, liquidity screens, and ambiguous predictions. We extend the literature using trading volume. Because trading volume is highly non-normally distributed (especially bond market volume), we derive a new, more powerful nonparametric test statistic that can be used in other applications. Abnormal volume is significant in the stock and bond markets around upgrades and downgrades. Some abnormal volume is attributable to credit ratings-based regulations. Controlling for other effects, we find evidence that upgrade announcements contain information.

Suggested Citation

  • Brogaard, Jonathan & Koski, Jennifer L. & Siegel, Andrew F., 2019. "Do upgrades matter? Evidence from trading volume," Journal of Financial Markets, Elsevier, vol. 43(C), pages 54-77.
  • Handle: RePEc:eee:finmar:v:43:y:2019:i:c:p:54-77
    DOI: 10.1016/j.finmar.2018.06.001
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    Keywords

    Credit ratings; Volume; Information; Nonparametric tests;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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