Capital Market Reactions and the Content of Credit Rating Reports: A Textual Analysis
Posted: 21 May 2016 Last revised: 12 Dec 2023
Date Written: May 19, 2016
Abstract
This paper analyzes the informational content of 3,365 Moody’s credit rating reports, such as rating changes, watchlist announcements, and outlooks, and their impact on financial markets. We test whether the tone or the length of credit rating report have an immediate impact on the equity or credit default swap (CDS) market and therefore provide new market information. Moreover, we analyze whether credit rating agencies (CRAs) have a monitoring type in financial markets.
Our results show that the tone of the rating report has an significant impact on stock returns and CDS spread. This is particularly driven by the negative words in the reports, resulting in negative stock market reaction and increasing CDS spreads. These results document the importance of credit rating reports and the role of CRAs as informational providers and underline their monitoring function for financial markets.
Keywords: Credit rating, Stock market, Credit default swap, Textual analysis, Textual tone
JEL Classification: G14, G15, G24, G32
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