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Good news, bad news and rating announcements: An empirical investigation

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  • Galil, Koresh
  • Soffer, Gil

Abstract

In this paper we employ a new approach to test the contribution of information in rating announcements. This is the first study to test and corroborate how the CDS market responds to rating actions after controlling for the presence of concurrent public and private information. We show that since the clustering of rating announcements characterizes economically significant developments, the common practice of using "uncontaminated" samples underestimates market response. As in previous studies, we find that the market response to bad news is stronger than to good news. Nevertheless, bad news and negative rating announcements tend to cluster. Therefore, the residual contribution of negative rating announcements is small and in some cases insignificant. Positive rating announcements are less frequent and less clustered, though their residual contribution is still significant.

Suggested Citation

  • Galil, Koresh & Soffer, Gil, 2011. "Good news, bad news and rating announcements: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3101-3119, November.
  • Handle: RePEc:eee:jbfina:v:35:y:2011:i:11:p:3101-3119
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Aymen Belgacem & Anna Creti & Khaled Guesmi & Amine Lahiani, 2015. "Volatility spillovers and macroeconomic announcements: evidence from crude oil markets," Applied Economics, Taylor & Francis Journals, vol. 47(28), pages 2974-2984, June.
    2. repec:eee:quaeco:v:66:y:2017:i:c:p:1-12 is not listed on IDEAS
    3. Galil, Koresh & Shapir, Offer Moshe & Amiram, Dan & Ben-Zion, Uri, 2014. "The determinants of CDS spreads," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 271-282.
    4. Norden, Lars, 2017. "Information in CDS spreads," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 118-135.
    5. Gabriela Kuvikova, 2015. "Credit Ratings and Their Information Value: Evidence from the Recent Financial Crisis," CERGE-EI Working Papers wp544, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Ballester, Laura & González-Urteaga, Ana, 2017. "How credit ratings affect sovereign credit risk: Cross-border evidence in Latin American emerging markets," Emerging Markets Review, Elsevier, vol. 30(C), pages 200-214.
    7. repec:kap:rqfnac:v:50:y:2018:i:2:d:10.1007_s11156-017-0641-1 is not listed on IDEAS
    8. Afik, Zvika & Feinstein, Itai & Galil, Koresh, 2014. "The (un)informative value of credit rating announcements in small markets," Journal of Financial Stability, Elsevier, vol. 14(C), pages 66-80.
    9. Kiesel, Florian & Kolaric, Sascha & Schiereck, Dirk, 2016. "Market integration and efficiency of CDS and equity markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 209-229.
    10. Wengner, Andreas & Burghof, Hans-Peter & Schneider, Johannes, 2015. "The impact of credit rating announcements on corporate CDS markets—Are intra-industry effects observable?," Journal of Economics and Business, Elsevier, vol. 78(C), pages 79-91.
    11. Drago, Danilo & Gallo, Raffaele, 2016. "The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 264-286.
    12. repec:eee:ememar:v:32:y:2017:i:c:p:38-51 is not listed on IDEAS
    13. Steinar Holden & Gisle James Natvik & Adrien Vigier, 2012. "An equilibrium model of credit rating agencies," Working Paper 2012/23, Norges Bank.
    14. repec:ipg:wpaper:2014-050 is not listed on IDEAS
    15. 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.
    16. Kosmidou, Kyriaki V. & Kousenidis, Dimitrios V. & Negakis, Christos I., 2015. "The impact of the EU/ECB/IMF bailout programs on the financial and real sectors of the ASE during the Greek sovereign crisis," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 440-454.
    17. Aymen Belgacem & Amine Lahiani, 2012. "More on the impact of US macroeconomic announcements: Evidence from French and German stock markets' volatility," Economics Bulletin, AccessEcon, vol. 32(2), pages 1509-1526.
    18. Kiesel, Florian, 2016. "The effect of credit and rating events on credit default swap and equity markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 81265, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    19. Kiesel, F., 2016. "Do Investors Still Rely on Credit Rating Agencies? Evidence from the Financial Crisis," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77927, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    20. repec:kap:sbusec:v:50:y:2018:i:2:d:10.1007_s11187-016-9833-7 is not listed on IDEAS
    21. Bakalyar, Inna & Galil, Koresh, 2014. "Rating shopping and rating inflation in Israel," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 270-280.

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