Credit Rating Announcements and Bond Liquidity (original) (raw)
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The influence of rating announcements on corporate debt market liquidity has been ignored for a long time. Based on an event study, this article examines the effects of the announcements of actual rating changes, outlook notices, and CreditWatch placements provided by Moody's, Standard and Poor's and Fitch on abnormal liquidity in the Spanish corporate debt market. Also, by means of cross-section regressions, we establish what factors determine the sign and intensity of the liquidity reactions. The presented results indicate that factors related to the characteristics of the rating announcement, the issuing company and the economic environment are relevant in light of several hypotheses.
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.
Credit rating announcements, trading activity and yield spreads: the Spanish evidence
International Journal of Monetary Economics and Finance, 2012
We test whether or not different rating announcements contain pricing-relevant information and modify trading activity patterns in the Spanish commercial paper and corporate bond markets. We observe a statistically significant widening of yield spreads in both segments of the corporate debt market after reviews of downgrades and negative outlook reports. In addition, we find that certain rating announcements encourage trading activity even when the information is not pricing-relevant. The release of information arouses investor interest for the involved securities. Thus, trading frequency increases, although larger-sized transactions, which should denote possible portfolio rebalancing, are not observed. In the commercial paper note market, we also find that that trading volumes fade away after reviews for downgrade. Investors seem to prefer reducing the trading of these short-term securities to liquidating their positions.
Good News is No News? The Impact of Credit Rating Changes on the Pricing of Asset-Backed Securities
SSRN Electronic Journal, 2004
We assess the impact of credit ratings on the pricing of structured financial products, using a sample of more than 1300 changes in Moody's or Standard and Poor's (S&P) ratings of U.S. asset-backed securities (ABS). We find that rating downgrades tend to be accompanied by negative returns and widening spreads, with the average effects stronger than those that have been reported in prior research on corporate and sovereign bond ratings. A portion of the negative implications of ABS downgrades are anticipated by price movements ahead of the rating action, although to a lesser degree than has been found for bond ratings. Accordingly, ABS market participants appear to rely somewhat more on rating age ncies as a source of negative news about credit risk. Nevertheless, because ABS rating downgrades are relatively rare events, their effects account for only a small fraction of the variance of returns. In contrast to our results on downgrades, market reactions to ABS rating upgrades are virtually zero, on average. Together, the results imply even greater asymmetry in the value-relevance of ABS rating changes than has been found in event studies of changes in bond ratings.
Credit rating announcement and bond liquidity: the case of emerging bond markets
Journal of Economics, Finance and Administrative Science
PurposeThis study examines the effect of the informational content of local credit rating announcements in emerging markets on the liquidity of their bond markets. This study analyses the liquidity of bonds in various emerging bond markets using a sample of nine countries: Argentina, Mexico, Peru, Hungary, Poland, Spain, Turkey, Hong Kong and Greece. The sample includes daily data on sovereign bonds that go from July 2009 to July 2017. The main focus is on the period before and after the sovereign debt crisis. This study notes that the bond liquidity is affected due to the sign of the rating granted by the rating agencies for each country.Design/methodology/approachThis study aims to question the sources of liquidity problem of sovereign bonds issued by the emerging countries. The study’s database consists of daily data of all nine emerging countries for the period from July 2009 to July 2017. Panel data were collected from the Datastream database.FindingsThis study first directly t...
Stock market reaction to credit rating changes: new evidence*
Asia-Pacific Journal of Accounting & Economics, 2020
This study shows how stock market reacts to rating change announcements where confounding effects of information spillover from related markets are absent. Contrary to existing literature, we find that the stock market reacts positively to a rating upgrade and no response to downgrade. Our analysis shows that pre-announcement cumulative abnormal returns can significantly predict announcement period abnormal return. Finally, we document a significant reduction in information asymmetry due to rating upgrade announcements affirming the recent policy initiatives.
Determinants of Trading Activity after Rating Actions in the Corporate Debt Market
Capital Markets: Asset Pricing & Valuation eJournal, 2011
The influence of rating announcements on corporate debt market trading has been previously overlooked. Based on an event study, we examine the effects of the three types of announcements provided by credit rating agencies on abnormal trading volume and trading frequency in the Spanish corporate debt market. Additionally, by means of cross-section regressions, we establish what factors determine the sign and intensity of the trading reactions. The presented results indicate that factors related to the characteristics of the rating announcement, the issuing company and the economic environment are relevant in light of several hypotheses.
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.