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The information content of credit ratings: evidence from European convertible bond markets

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  • Steffen Hundt
  • Björn Sprungk
  • Andreas Horsch

Abstract

Prior research has investigated the information content of credit ratings for standard financing instruments such as stocks and corporate bonds, while this question has been neglected for convertible bonds (CBs) so far. CBs are simultaneously determined by the bond floor and the conversion value, which makes it more difficult to assess price effects following rating announcements. In this context, we compare price effects of CBs with those of stocks and corporate bonds of the same issuer using robust event study methods. Our findings indicate that rating changes convey new information for investors in European CBs. In terms of the direction of the expected price reaction, we find CBs to react in a more debt-like manner to the announcement of a rating change. Moreover, our results provide evidence that the magnitude of price reactions differs among different types of securities.

Suggested Citation

  • Steffen Hundt & Björn Sprungk & Andreas Horsch, 2017. "The information content of credit ratings: evidence from European convertible bond markets," The European Journal of Finance, Taylor & Francis Journals, vol. 23(14), pages 1414-1445, November.
    • Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:1414-1445
    DOI: 10.1080/1351847X.2016.1204333
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    Cited by:

    1. Woo Sung Kim & Sekyung Oh & Halil Kiymaz, 2023. "Motives and market reactions to convertible bonds and bonds with warrants issuance in an emerging market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2449-2474, July.
    2. Hundt Steffen & Horsch Andreas, 2018. "The Effects of Sanctions on the Lending Policy and the Value of International Banks: the Case of Iran," Review of Middle East Economics and Finance, De Gruyter, vol. 14(3), pages 1-13, December.
    3. Liao, Yulu & Huang, Paoyu & Ni, Yensen, 2022. "Convertible bond issuance volume, capital structure, and firm value," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    4. Yuriy Zabolotnyuk, 2018. "Wealth Effects of Bond Rating Announcements," Multinational Finance Journal, Multinational Finance Journal, vol. 22(3-4), pages 211-254, September.

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