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Bank Rating Changes and Bank Stock Returns—Puzzling Evidence from the Emerging Markets

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  • Mr. Anthony J. Richards
  • Mr. David Deddouche

Abstract

This paper examines the performance of emerging market bank stocks around the time of rating changes by major international agencies. The data suggest that downgrades on average have followed periods of negative cumulative abnormal returns for banks, although upgrades have not followed periods of positive returns. More important, stock prices either do not respond to rating changes or respond in the opposite direction to what would be expected if announcements conveyed value-relevant information. The paper concludes that there are limits to the extent that supervisors in emerging markets can rely on market participants to monitor the safety and soundness of banks.

Suggested Citation

  • Mr. Anthony J. Richards & Mr. David Deddouche, 1999. "Bank Rating Changes and Bank Stock Returns—Puzzling Evidence from the Emerging Markets," IMF Working Papers 1999/151, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1999/151
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    1. Crabbe, Leland & Post, Mitchell A, 1994. "The Effect of a Rating Downgrade on Outstanding Commercial Paper," Journal of Finance, American Finance Association, vol. 49(1), pages 39-56, March.
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    Cited by:

    1. Seung Han & Yoon Shin & Walter Reinhart & William Moore, 2009. "Market Segmentation Effects in Corporate Credit Rating Changes: The Case of Emerging Markets," Journal of Financial Services Research, Springer;Western Finance Association, vol. 35(2), pages 141-166, April.
    2. Demirgüç-Kunt, AslI & Detragiache, Enrica & Tressel, Thierry, 2008. "Banking on the principles: Compliance with Basel Core Principles and bank soundness," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 511-542, October.
    3. Caprio, Gerard & Honohan, Patrick, 2004. "Can the unsophisticated market provide discipline?," Policy Research Working Paper Series 3364, The World Bank.
    4. Patrycja Chodnicka – Jaworska & Piotr Jaworski, 2019. "The Chinese and The Big Three Credit Rating Agencies – their impact on stock prices," Faculty of Management Working Paper Series 22019, University of Warsaw, Faculty of Management.
    5. Roman Kräussl, 2001. "Sovereign ratings and their impact on recent financial crises," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 7(2), pages 268-269, May.
    6. Graciela Kaminsky & Sergio L. Schmukler, 2002. "Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?," The World Bank Economic Review, World Bank, vol. 16(2), pages 171-195, August.
    7. Pukthuanthong-Le, Kuntara & Elayan, Fayez A. & Rose, Lawrence C., 2007. "Equity and debt market responses to sovereign credit ratings announcement," Global Finance Journal, Elsevier, vol. 18(1), pages 47-83.
    8. Kenjegaliev, Amangeldi & Duygun, Meryem & Mamedshakhova, Djamila, 2016. "Do rating grades convey important information: German evidence?," Economic Modelling, Elsevier, vol. 53(C), pages 334-344.
    9. Wojewodzki, Michal & Boateng, Agyenim & Brahma, Sanjukta, 2020. "Credit rating, banks' capital structure and speed of adjustment: A cross-country analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).
    10. Bremer, Marc & Pettway, Richard H., 2002. "Information and the market's perceptions of Japanese bank risk: Regulation, environment, and disclosure," Pacific-Basin Finance Journal, Elsevier, vol. 10(2), pages 119-139, April.
    11. Flávia Cruz de Souza Murcia & Fernando Dal-Ri Murcia & José Alonso Borba, 2013. "The Informational Content of Credit Ratings in Brazil: An Event Study," Brazilian Review of Finance, Brazilian Society of Finance, vol. 11(4), pages 503-526.
    12. Hesam Aldin SHAHRIVAR & Nwin Anefo Fru ASABA, 2013. "Assessment of the Impact of Trade Partner’s Cross-Country Sovereign Rating on the Financial Market of Selected Emerging Market Economies," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 13(2), pages 137-150.
    13. Wolfgang Gerstenberger & Joachim Jungfer & Heinz Schmalholz, 2002. "Standortbedingungen in Polen, Tschechien und Ungarn und die Position Sachsens im Standortwettbewerb : Gutachten im Auftrag der Wirtschaftsförderung Sachsen GmbH," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 33.

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