IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v50y2018i2d10.1007_s11156-017-0641-1.html
   My bibliography  Save this article

Measuring the effect of watch-preceded and direct rating changes: a note on credit markets

Author

Listed:
  • Florian Kiesel

    (Technische Universität Darmstadt)

  • Sascha Kolaric

    (Technische Universität Darmstadt)

Abstract

This paper analyzes the importance of distinguishing between watch-preceded and direct rating changes for the credit default swap (CDS) market by examining a total of 2991 rating change announcements, 1526 watchlist placement announcements, and 430 rating affirmations following watchlist placements. The results show that watch-preceded downgrades do not lead to significant CDS market reactions, while direct downgrades are associated with a significant increase in CDS spread levels. Likewise, we document that watchlist placements for downgrade lead to increases in firms’ CDS spreads. CDS markets do not react to rating upgrades but watchlist placements for upgrade result in an immediate decrease in CDS spreads. Rating affirmations following watchlist placements for downgrade lead to slight reductions in CDS spreads, while affirmations following watchlist placements for upgrade have no effect on CDS spreads. These findings demonstrate the importance for empirical research on the interaction between credit markets and rating announcements to differentiate between watch-preceded and direct rating changes, particularly for rating downgrades.

Suggested Citation

  • Florian Kiesel & Sascha Kolaric, 2018. "Measuring the effect of watch-preceded and direct rating changes: a note on credit markets," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 653-672, February.
    • Handle: RePEc:kap:rqfnac:v:50:y:2018:i:2:d:10.1007_s11156-017-0641-1
    DOI: 10.1007/s11156-017-0641-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-017-0641-1
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-017-0641-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jorion, Philippe & Liu, Zhu & Shi, Charles, 2005. "Informational effects of regulation FD: evidence from rating agencies," Journal of Financial Economics, Elsevier, vol. 76(2), pages 309-330, May.
    2. Chi-Hsiou D. Hung & Anurag Banerjee & Qingrui Meng, 2017. "Corporate financing and anticipated credit rating changes," Review of Quantitative Finance and Accounting, Springer, vol. 48(4), pages 893-915, May.
    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. Imbierowicz, Björn & Wahrenburg, Mark, 2013. "Wealth transfer effects between stockholders and bondholders," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 23-43.
    5. Kim, Yongtae & Nabar, Sandeep, 2007. "Bankruptcy probability changes and the differential informativeness of bond upgrades and downgrades," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3843-3861, December.
    6. Goh, Jeremy C. & Ederington, Louis H., 1999. "Cross-sectional variation in the stock market reaction to bond rating changes," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(1), pages 101-112.
    7. Ian W. Marsh & Wolf Wagner, 2016. "News-Specific Price Discovery in Credit Default Swap Markets," Financial Management, Financial Management Association International, vol. 45(2), pages 315-340, May.
    8. Finnerty, John D. & Miller, Cameron D. & Chen, Ren-Raw, 2013. "The impact of credit rating announcements on credit default swap spreads," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2011-2030.
    9. Benjamin Yibin Zhang & Hao Zhou & Haibin Zhu, 2009. "Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firms," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5099-5131, December.
    10. Arnoud W. A. Boot & Todd T. Milbourn & Anjolein Schmeits, 2006. "Credit Ratings as Coordination Mechanisms," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 81-118.
    11. Galil, Koresh & Soffer, Gil, 2011. "Good news, bad news and rating announcements: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3101-3119, November.
    12. Kee H. Chung & Carol Ann Frost & Myungsun Kim, 2012. "Characteristics and Information Value of Credit Watches," Financial Management, Financial Management Association International, vol. 41(1), pages 119-158, March.
    13. James W. Wansley & Terrence M. Clauretie, 1985. "The Impact Of Creditwatch Placement On Equity Returns And Bond Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 8(1), pages 31-42, March.
    14. Vincent Xiang & Michael T. Chng & Victor Fang, 2017. "The economic significance of CDS price discovery," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 1-30, January.
    15. Howard Chan & Robert Faff & Paula Hill & Harald Scheule, 2011. "Are Watch Procedures A Critical Informational Event In The Credit Ratings Process? An Empirical Investigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 34(4), pages 617-640, December.
    16. 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.
    17. Kiesel, F. & Kolaric, S. & Schiereck, D., 2016. "Market integration and efficiency of CDS and equity markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77819, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    18. Li, Joanne & Shin, Yoon S. & Moore, William T., 2006. "Reactions of Japanese markets to changes in credit ratings by global and local agencies," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 1007-1021, March.
    19. Kisgen, Darren J., 2009. "Do Firms Target Credit Ratings or Leverage Levels?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(6), pages 1323-1344, December.
    20. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
    21. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
    22. Ilia D. Dichev & Joseph D. Piotroski, 2001. "The Long‐Run Stock Returns Following Bond Ratings Changes," Journal of Finance, American Finance Association, vol. 56(1), pages 173-203, February.
    23. Bannier, Christina E. & Hirsch, Christian W., 2010. "The economic function of credit rating agencies - What does the watchlist tell us?," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3037-3049, December.
    24. Hsueh, L. Paul & Liu, Y. Angela, 1992. "Market anticipation and the effect of bond rating changes on common stock prices," Journal of Business Research, Elsevier, vol. 24(3), pages 225-239, May.
    25. Acharya, Viral V. & Johnson, Timothy C., 2007. "Insider trading in credit derivatives," Journal of Financial Economics, Elsevier, vol. 84(1), pages 110-141, April.
    26. Tang, Tony T., 2009. "Information asymmetry and firms' credit market access: Evidence from Moody's credit rating format refinement," Journal of Financial Economics, Elsevier, vol. 93(2), pages 325-351, August.
    27. David DeBoskey & Peter Gillett, 2013. "The impact of multi-dimensional corporate transparency on us firms’ credit ratings and cost of capital," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 101-134, January.
    28. Kiesel, Florian & Kolaric, Sascha & Schiereck, Dirk, 2016. "Market integration and efficiency of CDS and equity markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 209-229.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ginevra Marandola & Rossella Mossucca, 2021. "When did the stock market start to react less to downgrades by Moody’s, S&P and Fitch?," SN Business & Economics, Springer, vol. 1(2), pages 1-45, February.
    2. Winnie P. H. Poon & Jianfu Shen, 2020. "The roles of rating outlooks: the predictor of creditworthiness and the monitor of recovery efforts," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1063-1091, October.
    3. Binici, Mahir & Hutchison, Michael & Miao, Evan Weicheng, 2020. "Market price effects of agency sovereign debt announcements: Importance of prior credit states," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 769-787.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kiesel, F. & Kolaric, S., 2018. "Measuring the effect of watch-preceded and direct rating changes: a note on credit markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 87386, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    2. Kiesel, Florian, 2016. "The effect of credit and rating events on credit default swap and equity markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 81265, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    3. Kiesel, F., 2016. "The effect of credit and rating events on credit default swap and equity markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 81247, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    4. Florian Kiesel, 2021. "It's the tone, stupid! Soft information in credit rating reports and financial markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 553-585, September.
    5. Kiesel, Florian & Kolaric, Sascha & Norden, Lars & Schiereck, Dirk, 2021. "To change or not to change? The CDS market response of firms on credit watch," Journal of Banking & Finance, Elsevier, vol. 125(C).
    6. Kiesel, F., 2016. "Do Investors Still Rely on Credit Rating Agencies? Evidence from the Financial Crisis," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77927, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    7. Yuriy Zabolotnyuk, 2018. "Wealth Effects of Bond Rating Announcements," Multinational Finance Journal, Multinational Finance Journal, vol. 22(3-4), pages 211-254, September.
    8. Yang, Heejin & Ahn, Hee-Joon & Kim, Maria H. & Ryu, Doojin, 2017. "Information asymmetry and investor trading behavior around bond rating change announcements," Emerging Markets Review, Elsevier, vol. 32(C), pages 38-51.
    9. Winnie P. H. Poon & Jianfu Shen, 2020. "The roles of rating outlooks: the predictor of creditworthiness and the monitor of recovery efforts," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1063-1091, October.
    10. Norden, Lars, 2017. "Information in CDS spreads," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 118-135.
    11. May, Anthony D., 2010. "The impact of bond rating changes on corporate bond prices: New evidence from the over-the-counter market," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2822-2836, November.
    12. Panagiotis K. Staikouras, 2012. "A Theoretical and Empirical Review of the EU Regulation on Credit Rating Agencies: In Search of Truth, Not Scapegoats," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 21(2), pages 71-155, May.
    13. Kaveri Krishnan & Sankarshan Basu & Ashok Thampy, 2020. "Has the Global Financial Crisis Changed the Market Response to Credit Ratings? Evidence from an Emerging Market," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 19(1), pages 7-32, April.
    14. Federica Salvadè, 2018. "Is less information better information? Evidence from the credit rating withdrawal," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 139-157, July.
    15. Götze, Tobias & Gürtler, Marc, 2020. "Hard markets, hard times: On the inefficiency of the CAT bond market," Journal of Corporate Finance, Elsevier, vol. 62(C).
    16. Kraft, Pepa & Xie, Yuan & Zhou, Ling, 2020. "The intraday timing of rating changes," Journal of Corporate Finance, Elsevier, vol. 60(C).
    17. G. Marandola & R. Mossucca, 2016. "When did the stock market start to react less to downgrades by Moody s, S&P and Fitch?," Working Papers wp1066, Dipartimento Scienze Economiche, Universita' di Bologna.
    18. 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.
    19. Bannier, Christina E. & Hirsch, Christian W., 2010. "The economic function of credit rating agencies - What does the watchlist tell us?," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3037-3049, December.
    20. Ginevra Marandola & Rossella Mossucca, 2021. "When did the stock market start to react less to downgrades by Moody’s, S&P and Fitch?," SN Business & Economics, Springer, vol. 1(2), pages 1-45, February.

    More about this item

    Keywords

    Credit default swaps (CDS); Credit rating; Credit watchlist; Credit quality; Event study;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:50:y:2018:i:2:d:10.1007_s11156-017-0641-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.