Rating Changes: The European Evidence

Abstract:     
How do European stocks react to rating actions issued by Rating Agencies' Since rating agencies process private information and spread it on financial markets through upgrades and downgrades, stock investors should react to rating announcements conveying good or bad news. Using a Pan-European sample of more than 500 credit rating changes released by Moody's in the period 2002-2007 we show that the reaction to rating changes is asymmetric. Downgrades negatively affect equity value and upgrades show no significant impact on stock prices. The negative impact of downgrades is more intense in non-UK firms and for non-financial companies suggesting lower asymmetric information or higher disclosure in UK than in other European countries. Finally, multiple notch downgrades result in a larger stock price decrease compared to one notch negative actions.

working papers series