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The Impact of Rating Changes in Australian Financial Markets

Author

Listed:
  • Adam Creighton

    (Reserve Bank of Australia)

  • Luke Gower

    (Reserve Bank of Australia)

  • Anthony Richards

    (Reserve Bank of Australia)

Abstract

This paper tests the response of bond yield spreads and equity prices to credit rating changes in the Australian financial market. Unlike some earlier studies for foreign markets, we find evidence that both yield spreads and equity prices move in the ‘expected’ direction following rating changes. However, the impacts are relatively small. In addition, in the case of downgrades and equity returns, we find evidence of large movements in prices in the six months prior to the rating announcement, suggesting that rating changes are largely validating information that has already been factored into equity prices. We also find that announcement effects are larger for small firms, for re-ratings from investment to speculative grade, and for cases where agencies have not indicated that the rating is under review.

Suggested Citation

  • Adam Creighton & Luke Gower & Anthony Richards, 2004. "The Impact of Rating Changes in Australian Financial Markets," RBA Research Discussion Papers rdp2004-02, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2004-02
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    File URL: http://www.rba.gov.au/publications/rdp/2004/pdf/rdp2004-02.pdf
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    References listed on IDEAS

    as
    1. Doron Kliger & Oded Sarig, 2000. "The Information Value of Bond Ratings," Journal of Finance, American Finance Association, vol. 55(6), pages 2879-2902, December.
    2. Berger, Allen N & Davies, Sally M & Flannery, Mark J, 2000. "Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 641-667, August.
    3. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-752, June.
    4. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
    5. Goh, Jeremy C & Ederington, Louis H, 1993. " Is a Bond Rating Downgrade Bad News, Good News, or No News for Stockholders?," Journal of Finance, American Finance Association, vol. 48(5), pages 2001-2008, December.
    6. Reint Gropp & Anthony J. Richards, 2001. "Rating Agency Actions and the Pricing of Debt and Equity of European Banks: What Can we Infer About Private Sector Monitoring of Bank Soundness?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(3), pages 373-398, November.
    7. Philip Lowe, 2002. "Credit risk measurement and procyclicality," BIS Working Papers 116, Bank for International Settlements.
    8. C. H. Furfine & Jeffery D. Amato, 2003. "Are credit ratings procyclical?," BIS Working Papers 129, Bank for International Settlements.
    9. Ederington, Louis H. & Goh, Jeremy C., 1998. "Bond Rating Agencies and Stock Analysts: Who Knows What When?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(04), pages 569-585, December.
    10. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    11. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
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    Citations

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    Cited by:

    1. Fang, Victor & Hung, Chi-Hsiou D., 2014. "Corporate bond prices and idiosyncratic risk: Evidence from Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 99-114.
    2. Bissoondoyal-Bheenick, Emawtee & Brooks, Robert, 2015. "The credit risk–return puzzle: Impact of credit rating announcements in Australia and Japan," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 37-55.
    3. Abdelkader Boudriga & Dorsaf Azouz Ghachem, 2016. "Does US stock market react differently to rating announcements during crisis period? The case of the 2008 worldwide financial crisis," American Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 4(3/4), pages 193-214.
    4. Dorsaf Azouz Ghachem & Abdelkader Boudriga & Chokri Mamoghli, 2011. "Does The American Stock Market React Differently to Rating Announcements During A Crisis Period? The Case of the 2008 Worldwide Financial Crisis," Working Papers 601, Economic Research Forum, revised 07 Jan 2011.
    5. María Concepción Verona Martel & José Juan Déniz Mayor, 2011. "Las agencias de rating y la crisis fi nanciera de 2008: ¿El fi n de un poder sin control?," REVISTA CRITERIO LIBRE, UNIVERSIDAD LIBRE - SEDE PRINCIPAL, June.
    6. Francois Lantin, 2008. "La prise en compte de l'effet taille dans la notation financière (rating)," Post-Print halshs-00692573, HAL.
    7. Rubina Shaheen & Attiya Yasmin Javid, 2014. "Effect of Credit Rating on Firm Performance and Stock Return; Evidence form KSE Listed Firms," PIDE-Working Papers 2014:104, Pakistan Institute of Development Economics.
    8. Rashid Ameer, 2007. "What Moves the Primary Stock and Bond Markets? Influence of Macroeconomic Factors on Bond and Equity Issues in Malaysia and Korea," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 3(1), pages 93-116.
    9. repec:bla:acctfi:v:57:y:2017:i:2:p:373-400 is not listed on IDEAS
    10. Jue Wang & Jiri Svec & Maurice Peat, 2014. "The Information Content of Ratings: An Analysis of Australian Credit Default Swap Spreads," Abacus, Accounting Foundation, University of Sydney, vol. 50(1), pages 56-75, March.
    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. Bastidon, Cécile & Gilles, Philippe & Huchet, Nicolas, 2008. "The international lender of last resort and selective bail-out," Emerging Markets Review, Elsevier, vol. 9(2), pages 144-152, June.
    13. repec:eee:finana:v:55:y:2018:i:c:p:1-22 is not listed on IDEAS
    14. Hu, Haoshen & Kaspereit, Thomas & Prokop, Jörg, 2016. "The information content of issuer rating changes: Evidence for the G7 stock markets," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 99-108.
    15. John Ammer & Nathanael Clinton, 2004. "Good news is no news? The impact of credit rating changes on the pricing of asset-backed securities," International Finance Discussion Papers 809, Board of Governors of the Federal Reserve System (U.S.).
    16. repec:hur:ijaraf:v:7:y:2017:i:4:p:146-159 is not listed on IDEAS
    17. repec:kap:sbusec:v:50:y:2018:i:2:d:10.1007_s11187-016-9833-7 is not listed on IDEAS

    More about this item

    Keywords

    credit rating agencies; rating changes; event study; Australia;

    JEL classification:

    • 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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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