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The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

Listed author(s):
  • Michaelides, Alexander
  • Milidonis, Andreas
  • Nishiotis, George P.
  • Papakyriakou, Panayiotis

Rating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes, making information leakage likely. Using cross-country data from 1988 to 2012, we find evidence of information leakage. In particular, we find statistically and economically significant negative daily abnormal stock index returns prior to downgrade announcements. These effects are more pronounced in countries with lower institutional quality, and they persist during times with no downgrade rumors and no concurrent bad news in general. A mild post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage and, thus, should be a policy concern for capital market regulators.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304405X1400275X
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 116 (2015)
Issue (Month): 3 ()
Pages: 526-547

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Handle: RePEc:eee:jfinec:v:116:y:2015:i:3:p:526-547
DOI: 10.1016/j.jfineco.2014.12.005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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