IDEAS home Printed from https://ideas.repec.org/p/ucm/doicae/0505.html
   My bibliography  Save this paper

Risk and returns around bond rating changes: New evidence from the Spanish Stock Market

Author

Listed:
  • Pilar Abad Romero

    (Universidad Complutense de Madrid, Dpto. de Economía Cuantica)

  • M. Dolores Robles Fernández

    (Universidad Complutense de Madrid, Dpto. de Economía Cuantica)

Abstract

This study analyzes the effect of corporate bond rating changes over stock prices. We explore the effects over excess of returns and systematic risk. Rating changes by Moody´s, Standard and Poor´sor FitchIBCA are analyzed. On an efficient market, these changes will omly have some effect if they contain some new information or if they are associated to a redistribution of dummy approach. Our results indicate that rating downgrades do not cause abnormal returns around the date of the announcement while upgrades cause significantly negative effect.

Suggested Citation

  • Pilar Abad Romero & M. Dolores Robles Fernández, 2005. "Risk and returns around bond rating changes: New evidence from the Spanish Stock Market," Documentos de Trabajo del ICAE 0505, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    • Handle: RePEc:ucm:doicae:0505
    as

    Download full text from publisher

    File URL: https://eprints.ucm.es/id/eprint/7882/1/0505.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Crouhy, Michel & Galai, Dan & Mark, Robert, 2001. "Prototype risk rating system," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 47-95, January.
    2. 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.
    3. Nayar, Nandkumar & Rozeff, Michael S, 1994. "Ratings, Commercial Paper, and Equity Returns," Journal of Finance, American Finance Association, vol. 49(4), pages 1431-1449, September.
    4. repec:bla:jfinan:v:53:y:1998:i:6:p:2185-2204 is not listed on IDEAS
    5. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    6. Richard Followill & Terrence Martell, 1997. "Bond review and rating change announcements: An examination of informational value and market efficiency," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 21(2), pages 75-82, June.
    7. 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.
    8. Impson, C Michael & Karafiath, Imre & Glascock, John L, 1992. "Testing Beta Stationarity across Bond Rating Changes," The Financial Review, Eastern Finance Association, vol. 27(4), pages 607-618, November.
    9. Karpoff, Jonathan M. & Rankine, Graeme, 1994. "In search of a signaling effect: The wealth effects of corporate name changes," Journal of Banking & Finance, Elsevier, vol. 18(6), pages 1027-1045, December.
    10. 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.
    11. Karafiath, Imre, 1988. "Using Dummy Variables in the Event Methodology," The Financial Review, Eastern Finance Association, vol. 23(3), pages 351-357, August.
    12. Zaima, Janis K & McCarthy, Joseph E, 1988. "The Impact of Bond Rating Changes on Common Stocks and Bonds: Tests of the Wealth Redistribution Hypothesis," The Financial Review, Eastern Finance Association, vol. 23(4), pages 483-498, November.
    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. Thomas Lagner & Dodozu Knyphausen‐Aufseß, 2012. "Rating Agencies as Gatekeepers to the Capital Market: Practical Implications of 40 Years of Research," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 21(3), pages 157-202, August.
    2. Matthies, Alexander B., 2013. "Empirical research on corporate credit-ratings: A literature review," SFB 649 Discussion Papers 2013-003, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. Mohamed Abulgasem A. Elhaj & Nurul Aini Muhamed & Nathasa Mazna Ramli & Nor Balkish Zakaria, 2016. "Ownership Monitoring Mechanism over Sukuk Credit Rating," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(12), pages 700-720, December.
    4. Patrycja Chodnicka – Jaworska & Piotr Jaworski, 2019. "The Chinese and The Big Three Credit Rating Agencies – their impact on stock prices," Faculty of Management Working Paper Series 22019, University of Warsaw, Faculty of Management.
    5. Yuriy Zabolotnyuk, 2018. "Wealth Effects of Bond Rating Announcements," Multinational Finance Journal, Multinational Finance Journal, vol. 22(3-4), pages 211-254, September.
    6. Rima Ayu Shintyawati & Caturida Meiwanto Doktoralina & Nurhasanah & Sri Anah, 2020. "The Volume of Issuance of Government Islamic Securities SR-007 Series, 2015¨C2018," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(5), pages 56-68, October.
    7. Paula Hill & Robert Faff, 2010. "The Market Impact of Relative Agency Activity in the Sovereign Ratings Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9‐10), pages 1309-1347, November.
    8. Afik, Zvika & Zabolotnyuk, Yuriy, 2023. "Information effect of credit rating announcements in transition economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    9. Mengyao Kang, 2022. "Credit rating downgrade risk and acquisition decisions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(5-6), pages 1011-1073, May.

    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. Pilar Abad Romero & Mª Dolores Robles Fernández, 2003. "Contenido informativo de los cambios de Rating en el mercado de Valores Español," Documentos de Trabajo del ICAE 0304, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    2. Yuriy Zabolotnyuk, 2018. "Wealth Effects of Bond Rating Announcements," Multinational Finance Journal, Multinational Finance Journal, vol. 22(3-4), pages 211-254, September.
    3. Chan, Pak To & Edwards, Vic & Walter, Terry, 2009. "The information content of Australian credit ratings: A comparison between subscription and non-subscription-based credit rating agencies," Economic Systems, Elsevier, vol. 33(1), pages 22-44, March.
    4. 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.
    5. Bremer, Marc & Pettway, Richard H., 2002. "Information and the market's perceptions of Japanese bank risk: Regulation, environment, and disclosure," Pacific-Basin Finance Journal, Elsevier, vol. 10(2), pages 119-139, April.
    6. 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.
    7. 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.
    8. Pilar Abad-Romero & M. Robles-Fernández, 2007. "Bond rating changes and stock returns: evidence from the Spanish stock market," Spanish Economic Review, Springer;Spanish Economic Association, vol. 9(2), pages 79-103, June.
    9. Flávia Cruz de Souza Murcia & Fernando Dal-Ri Murcia & José Alonso Borba, 2013. "The Informational Content of Credit Ratings in Brazil: An Event Study," Brazilian Review of Finance, Brazilian Society of Finance, vol. 11(4), pages 503-526.
    10. Misheck Mutize & Sean J. Gossel, 2019. "Sovereign Credit Rating Announcement Effects on Foreign Currency Denominated Bond and Equity Markets in Africa," Journal of African Business, Taylor & Francis Journals, vol. 20(1), pages 135-152, January.
    11. Dorsaf Azouz Ghachem & Abdelkader Boudriga & Chokri Mamoghli, 2011. "Does The American Stock Market React Differently to Rating Announcements During A Crisis Period? The Case of the 2008 Worldwide Financial Crisis," Working Papers 601, Economic Research Forum, revised 07 Jan 2011.
    12. repec:uts:finphd:36 is not listed on IDEAS
    13. Bissoondoyal-Bheenick, Emawtee, 2005. "An analysis of the determinants of sovereign ratings," Global Finance Journal, Elsevier, vol. 15(3), pages 251-280, February.
    14. Giovanni Ferri & Andrea Morone, 2014. "The effect of rating agencies on herd behaviour," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 9(1), pages 107-127, April.
    15. 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.
    16. 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.
    17. Chamroeun Sok, 2012. "Corporate Credit Rating Announcements: Information Content of Rating Announcements Models: Evidence from the Australian Financial Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4-2012, January-A.
    18. Afik, Zvika & Zabolotnyuk, Yuriy, 2023. "Information effect of credit rating announcements in transition economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    19. Pandej Chintrakarn & Sirimon Treepongkaruna & Pornsit Jiraporn & Sang Mook Lee, 2020. "Do LGBT-Supportive Corporate Policies Improve Credit Ratings? An Instrumental-Variable Analysis," Journal of Business Ethics, Springer, vol. 162(1), pages 31-45, February.
    20. Mendoza-Velázquez, Alfonso, 2009. "The information content and redistribution effects of state and municipal rating changes in Mexico," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-21.
    21. Bissoondoyal-Bheenick, Emawtee, 2004. "Rating timing differences between the two leading agencies: Standard and Poor's and Moody's," Emerging Markets Review, Elsevier, vol. 5(3), pages 361-378, September.

    More about this item

    Keywords

    Credit rating agencies; Rating changes; Event study; Stock returns; Event study dummy approach; Systematic risk; SUR.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:ucm:doicae:0505. 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: Águeda González Abad (email available below). General contact details of provider: https://edirc.repec.org/data/feucmes.html .

    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.