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The value of credit rating changes across economic cycles

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  • Ryan, Patricia A.
  • Villupuram, Sriram V.
  • Zygo, Jeffrey G.

Abstract

This paper examines how credit rating changes of US based firms affect equity markets in differing economic conditions and across different bond types. This study examines cross-sectional reactions upon a rating change, controlling for potential variance changes on the event day. Consistent with earlier works, we document a negative wealth effect for downgrades and no reaction for upgrades. Interestingly, however, we find there is a significant difference in stock price reaction to downgrades during periods of contraction versus periods of expansion. Reactions to downgrades are driven by smaller firms. Speculative firms are also more likely to hold higher risk of default and these firms see significant stock price reactions following a credit rating change due to both higher information asymmetry and default likelihood.

Suggested Citation

  • Ryan, Patricia A. & Villupuram, Sriram V. & Zygo, Jeffrey G., 2017. "The value of credit rating changes across economic cycles," Journal of Economics and Business, Elsevier, vol. 92(C), pages 1-9.
    • Handle: RePEc:eee:jebusi:v:92:y:2017:i:c:p:1-9
    DOI: 10.1016/j.jeconbus.2017.05.003
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    Cited by:

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    2. Leite, Brian J. & Uysal, Vahap B., 2023. "Does ESG matter to investors? ESG scores and the stock price response to new information," Global Finance Journal, Elsevier, vol. 57(C).
    3. Gaurav Dawar & Shivangi Bhatia & Jai Parkash Bindal, 2023. "Does Credit Rating Revisions Affect the Price of Common Stock: A Study of Indian Capital Market," Business Perspectives and Research, , vol. 11(2), pages 190-209, May.
    4. Xiangyun Zhou & Yixiang Tian & Ping Zhang & Xiurong Chen, 2018. "Incentive and constraint regulations of rating inflation in collusion over the separation of economic cycles - Markov rating shopping dual reputation model," PLOS ONE, Public Library of Science, vol. 13(10), pages 1-18, October.
    5. Lu Wei & Chen Han & Yinhong Yao, 2022. "The Bias Analysis of Oil and Gas Companies’ Credit Ratings Based on Textual Risk Disclosures," Energies, MDPI, vol. 15(7), pages 1-12, March.
    6. Karminsky, A. & Dyachkova, N., 2020. "Empirical study of the relationship between credit cycles and changes in credit ratings," Journal of the New Economic Association, New Economic Association, vol. 48(4), pages 138-160.

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