The Adverse Effects of Systematic Leakage Ahead of Official Sovereign Debt Rating Announcements
Imperial College Business School; Centre for Economic Policy Research (CEPR)
Nanyang Technological University (NTU) - Division of Banking & Finance; University of Cyprus - Department of Public & Business Administration
University of Cyprus - Department of Accounting and Finance
University of Cyprus - Department of Public and Business Administration
September 15, 2014
Journal of Financial Economics (JFE), Forthcoming
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
Date posted: December 17, 2011 ; Last revised: September 16, 2014
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