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The Adverse Effects of Systematic Leakage Ahead of Official Sovereign Debt Rating Announcements


Alexander Michaelides


Imperial College Business School; University of Cyprus - Department of Public and Business Administration; Centre for Economic Policy Research (CEPR)

Andreas Milidonis


Nanyang Technological University (NTU) - Division of Banking & Finance; University of Cyprus - Department of Public & Business Administration

George Nishiotis


University of Cyprus - Department of Public and Business Administration

Panayiotis Papakyriacou


University of Cyprus - Department of Public and Business Administration

September 15, 2014

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
Rating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes, making information leakage likely. Using cross-country data from 1988 to 2012, we find evidence of information leakage. In particular, we find statistically and economically significant negative daily abnormal stock index returns prior to downgrade announcements. These effects are more pronounced in countries with lower institutional quality, and persist during times with no downgrade rumors and no concurrent bad news in general. A mild post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage, and thus should be a policy concern for capital market regulators.

Number of Pages in PDF File: 81

Keywords: sovereign ratings, event studies, institutional quality, information leakage, TRMI

JEL Classification: G14, G15, G24

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Date posted: December 17, 2011 ; Last revised: September 16, 2014

Suggested Citation

Michaelides, Alexander and Milidonis, Andreas and Nishiotis, George and Papakyriacou, Panayiotis, The Adverse Effects of Systematic Leakage Ahead of Official Sovereign Debt Rating Announcements (September 15, 2014). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1973556 or http://dx.doi.org/10.2139/ssrn.1973556

Contact Information

Alexander Michaelides
Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London SW7 2AZ, DC SW7 2AZ
United Kingdom
University of Cyprus - Department of Public and Business Administration ( email )
75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Andreas Milidonis (Contact Author)
Nanyang Technological University (NTU) - Division of Banking & Finance ( email )
S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore
University of Cyprus - Department of Public & Business Administration ( email )
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)
HOME PAGE: http://www.ucy.ac.cy/~amilidon/
George P. Nishiotis
University of Cyprus - Department of Public and Business Administration ( email )
75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
357 22893617 (Phone)
357 22892460 (Fax)
Panayiotis Papakyriacou
University of Cyprus - Department of Public and Business Administration ( email )
75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
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