On the Informativeness of Credit Watch Placements
33 Pages Posted: 11 Sep 2008 Last revised: 12 Nov 2013
Date Written: April 2009
This study examines the informational role of credit watch placements in the overall bond rating process. We show that the act of a company’s bond being put on a credit watch is, in itself, associated with significant abnormal returns in the company’s stock and bond rating revision that are associated with their initial inclusion on credit watch, are more informative than rating changes solely without credit watch. Furthermore, institutional trading in equities displays opportunism around the event of the corresponding companies’ bonds being included on the watchlist, around its subsequent upgrade or downgrade, as well as over the interim transitional period. More importantly, institutions earn economically and statistically significant profits from their trades following credit watch events. Overall, our findings underscore the importance of credit watch placements in the overall fabric of credit ratings adjustments and on informed trading behavior.
Keywords: credit rating agency, credit watch, bond rating, abnormal returns, institutional trading
JEL Classification: G11, G14, G20
Suggested Citation: Suggested Citation