The Reaction of Stock Prices to Rating Changes
Commissione Nazionale per le Societa e la Borsa (CONSOB)
July 31, 2004
The paper investigates the reaction of common stock returns to rating changes for a sample of 299 rating actions involving Italian firms and announced by Fitch, Moody's and Standard&Poor's from January 1991 till August 2003. Rating changes and credit watches are classified according to direction, reason, the sector of the rated entities, anticipation through watches and contamination by concurrent news. Significant average excess returns are recorded only for negative watches and for actual downgrades. Abnormal returns however seem to be driven mainly by the release of relevant information around the announcement of the rating action. The study, by providing evidence for a specific European country, is a useful sensitivity check to the earlier empirical research, mainly focused on the U.S. case.
Number of Pages in PDF File: 25
Keywords: Rating action, market efficiency, event study
JEL Classification: G14, G18, G29working papers series
Date posted: August 4, 2004
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