On the Informativeness of Credit Watch Placements (original) (raw)
Related papers
Informational Effects of Regulation FD: Evidence from Rating Agencies 12 PUBLICATIONS 215 CITATIONS
This paper studies changes in the information environment brought about by Regulation Fair Disclosure (FD), which was implemented on October 23, 2000. FD now prohibits U.S. public companies from making selective, non-public disclosures to favored investment professionals. FD, however, has a number of exclusions, one of which still allows disclosure of non-public information to credit rating agencies. As a result, credit analysts at rating agencies now have access to confidential information that is not made available to equity analysts any more. This can potentially increase the value of credit ratings to equity investors. We examine a sample of credit rating changes and their effect on the company's stock price. We find that the informational effect of downgrades and upgrades is much bigger in the post-FD period.
Information Effects of Bond Rating Changes: The Role of the Rating Prior to the Announcement
This paper shows that studies of announcement effects of bond rating changes should take into account the initial rating. First, we provide theoretical support for different price effects as a non-linear function of the initial credit rating, using a structural, Merton-type model linking the change in default probability to the change in the stock price. Next, we show that this theoretical prediction is verified in the empirical data. We find much stronger stock price effects for bond rating changes for low-rated firms relative to high-rated firms. Accounting for the role of the initial rating explains in large part the puzzling empirical regularity that stock price effects are associated with downgrades but not upgrades. In addition, it eliminates the investment-grade barrier effect reported in previous studies.
The New Rules of the Rating Game: Market Perception of Corporate Ratings
SSRN Electronic Journal, 2015
In this paper, we analyze the impact of credit rating changes on the pricing and liquidity of US corporate bonds. In particular, we address the question of whether the informativeness of rating events varies in dierent economic environments, particularly after the introduction of the Dodd-Frank Act. During the nancial crisis, rating agencies and ratingcontingent regulation were blamed for causing inated (overly optimistic and often stale) ratings, triggering, to some extent, the near collapse of the nancial system, and leading to important regulatory reforms. It is essential, therefore, to understand the impact of downgrades/upgrades on prices and trading activity, particularly in the aftermath of these reforms. We nd that the informativeness of rating changes is low before the crisis, particularly for nancial bonds. However, after the passage of the Dodd-Frank Act, rating changes lead to signicantly stronger market reactions for non-nancial bonds, whereas the reactions are weaker for nancial bonds, indicating that the new regulatory framework has ambiguous eects on the impact of such changes. We link this nding to the dierence in complexity of the securities by testing various hypotheses based on existing models of rating agency behavior in dierent regulatory and economic environments.
The Credit Rating Crisis and the Informational Content of Corporate Credit Ratings
SSRN Electronic Journal, 2010
There has been much scrutiny of the Credit Rating Agencies' (CRAs) flawed ratings of structured products in the build-up to the financial crisis. Our study examines whether the 'credit rating crisis' altered the information effects of their traditional product, corporate bond ratings. Using an event study, we analyze the Credit Default Swap (CDS) market's response to rating announcements by Moody's between September 2004 and December 2009. Our results demonstrate that CDS price effects were considerably greater in the pre-crisis era, and document a possible spillover effect of reputational damage onto the bond rating services of the CRAs.
Credit watch placement and security price behavior around bond rating revisions
Investment management & financial innovations, 2014
This study examines the informational role of credit watch placement in the overall bond rating process from 1992 to 2006. The paper uses standard event study to examine the market reaction of the whole process of credit rating change which includes credit watch placement, transitional period, and actual rating change. The authors find that the act of a company's bond being put on both positive and negative credit watch placements are associated with significant abnormal returns in the company's stock while negative credit watch placement helps reduce the negative market reaction on the actual rating downgrade. The paper shows that bond rating revisions associated with initial inclusion on credit watch placement are more informative than rating changes that occur without initial inclusion on a credit watchlist. Finally, the authors examine the credit rating impact under different level of analyst coverage. The authors conclude that low analyst coverage firms which contain low information in the market consistently have larger market impacts than high analyst coverage firms.
Information Effects of Bond Rating Changes
The Journal of Fixed Income, 2007
This paper shows that studies of announcement effects of bond rating changes should take into account the rating prior to the announcement. First, we provide theoretical support for different price effects as a non-linear function of the prior credit rating, using a structural, Mertontype model linking the change in default probability to the change in the stock price. Next, we show that this theoretical prediction is verified in the empirical data. We find much stronger information effects, measured by stock price effects, for rating changes for low-rated firms relative to high-rated firms. Accounting for the role of the rating prior to the announcement explains in large part the puzzling empirical regularity that stock price effects are associated with downgrades but not upgrades. In addition, it eliminates the investment-grade barrier effect reported in previous studies.
SSRN Electronic Journal, 2004
The present paper investigates the reaction of common stock returns to rating changes: it is the first empirical evidence for the Italian case. The analysis focuses on a sample of 299 rating actions announced by Fitch, Moody's and Standard&Poor's with respect to Italian firms in the period January 1991-August 2003. Rating changes announcement are classified according to the their direction (i.e. upgrades versus downgrades), their anticipation (i.e. rating actions following additions to a credit watch list), the presence of concurrent news, the reason of the rating action, the sector of the issuer. Additions to credit watch lists were also examined as separate events. The results showed significant average excess returns in the event window only for additions to the negative credit watch list and for actual downgrades. Additions to positive credit watch list and upgrades show statistically significant and positive abnormal returns after the event window. These evidence is consistent with the results found by the previous literature. Expected rating actions exhibit a greater impact on market prices than unexpected ones: such result may in part be explained by the fact that most of the expected rating actions are also anticipated by a concurrent disclosure. Contaminated events are in fact associated with a higher stock price reaction; this is also true for the sample of downgrades following mergers and acquisitions, which almost overlap with the contaminated sample. Finally, t he impact of rating changes seems to be different depending on the sector of the issuer only for downgrades: the results show that negative abnormal returns are lower for financial than for industrial firms. Overall, the abnormal returns, if any, seem to be driven mainly by concurrent disclosure concerning the reason underlying the rating action. The striking result is, however, the absence of pre-announcement abnormal returns even for the contaminated subsample: this might be indirect evidence that rating agencies react promptly when to the news which is already in the public domain. On policy grounds, the evidence lends support to those advocating that ratings cannot be usefully employed as an instrument for investor protection.
Why they keep missing: An empirical investigation of rational inattention of rating agencies
2017
Sovereign ratings have frequently failed to predict crises. However, the literature has focused on explaining rating levels rather than the timing of rating announcements. We fill this gap by explicitly differentiating between a decision to assess a country and the actual rating decision. Thereby, we account for rational inattention of rating agencies that exists due to costs of reassessment. Exploiting information of rating announcements, we show that (i) the proposed differentiation significantly improves estimation; (ii) rating agencies consider many nonfundamental factors in their reassessment decision; (iii) markets only react to ratings providing new information; (iv) developed countries get preferential treatment.