Rating Agency Actions and the Pricing of Debt and Equity of European Banks: What Can We Infer About Private Sector Monitoring of Bank Soundness?
36 Pages Posted: 25 Feb 2003
Date Written: August 2001
Abstract
The recent consultative papers by the Basel Committee suggest an explicit role for external rating agencies in the assessment of the credit risk of banks' assets. In this context, an assessment of the information contained in credit ratings is important. We address this issue via an event study of rating change announcements by leading international rating agencies, focussing on a sample of European banks. We find no evidence of announcement effects on bond prices. We are largely able to exclude lack of liquidity as an explanation for this puzzling result and suggest some alternatives, such as "too-big-to-fail." For equity prices, we find strong effects of unexpected ratings changes and confirm prior evidence that stock prices may react very differently to ratings downgrades, depending on the underlying reason. Overall, our results suggest that ratings agencies may perform a useful role in summarising and obtaining non-public information on banks, at least for stockholders.
Keywords: bond ratings; event study; banks; abnormal returns
JEL Classification: G21, G14, G18
Suggested Citation: Suggested Citation
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