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

Author

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  • Michaelides, Alexander
  • Milidonis, Andreas
  • Nishiotis, George P.
  • Papakyriakou, Panayiotis

Abstract

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.

Suggested Citation

  • Michaelides, Alexander & Milidonis, Andreas & Nishiotis, George P. & Papakyriakou, Panayiotis, 2015. "The adverse effects of systematic leakage ahead of official sovereign debt rating announcements," Journal of Financial Economics, Elsevier, vol. 116(3), pages 526-547.
    • Handle: RePEc:eee:jfinec:v:116:y:2015:i:3:p:526-547
    DOI: 10.1016/j.jfineco.2014.12.005
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    More about this item

    Keywords

    Sovereign ratings; Event studies; Institutional quality; Information leakage; TRMI;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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