On the Informativeness of Credit Watch Placements

33 Pages Posted: 11 Sep 2008 Last revised: 12 Nov 2013

Sugato Chakravarty

Purdue University

Chiraphol N. Chiyachantana

Singapore Management University - Lee Kong Chian School of Business

Yen Teik Lee

Curtin University of Technology, Singapore

Date Written: April 2009

Abstract

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

Chakravarty, Sugato and Chiyachantana, Chiraphol N. and Lee, Yen Teik, On the Informativeness of Credit Watch Placements (April 2009). Available at SSRN: https://ssrn.com/abstract=1252542 or http://dx.doi.org/10.2139/ssrn.1252542

Sugato Chakravarty

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Chiraphol N. Chiyachantana (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Yen Teik Lee

Curtin University of Technology, Singapore ( email )

92 Jln Rajah
329162
Singapore

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