Credit Rating and Stock Return Comovement

55 Pages Posted: 11 Mar 2021 Last revised: 22 Mar 2023

See all articles by Jianfeng Shen

Jianfeng Shen

UNSW Business School, University of New South Wales

Huiping Zhang

James Cook University - College of Business, Law and Governance,

Weiqi Zhang

affiliation not provided to SSRN

Date Written: March 21, 2023

Abstract

Firms with similar credit ratings, especially junk-rated ones, tend to comove strongly with each other in stock returns. Following a firm’s downgrade to junk grade, it tends to comove more strongly with other junk-rated firms and less with investment-rated ones, which cannot be fully explained by changes in fundamentals. Finally, we find evidence consistent with the investor clientele effect explanation by examining a) how mutual funds with different credit preferences adjust their holdings of downgraded firms and b) how flows to mutual funds that tend to invest in junk-rated firms affect these firms’ stock returns and comovement.

Keywords: Comovement, Credit rating, Investor clientele effect

JEL Classification: G12, G14, G23, G24

Suggested Citation

Shen, Jianfeng and Zhang, Huiping and Zhang, Weiqi, Credit Rating and Stock Return Comovement (March 21, 2023). Available at SSRN: https://ssrn.com/abstract=3801282 or http://dx.doi.org/10.2139/ssrn.3801282

Jianfeng Shen (Contact Author)

UNSW Business School, University of New South Wales ( email )

School of Banking and Finance
UNSW Sydney, NSW 2052
Australia

Huiping Zhang

James Cook University - College of Business, Law and Governance, ( email )

Singapore
Singapore

Weiqi Zhang

affiliation not provided to SSRN

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