Characteristics and Information Value of Credit Watches

Financial Management, Forthcoming

69 Pages Posted: 31 Dec 2008 Last revised: 4 Jan 2012

Kee H. Chung

State University of New York at Buffalo - School of Management

Carol Ann Frost

University of North Texas

Myungsun Kim

SUNY at Buffalo

Date Written: October 11, 2011

Abstract

We analyze credit watch and rating actions to better understand the role of credit watches in the credit rating process. We find that watch actions are more frequently prompted by specific, publicly known events than are rating actions. The likelihood that a watch action precedes a rating action varies systematically with proxies for investor demand for credit quality information and the adverse consequences of issuing a rating change prematurely. Credit watches occur more often in response to deterioration in credit quality, and issuers make concerted efforts to address the concerns that prompted down watches. Down watches are less likely than up watches to indicate the direction of the subsequent rating change. Watch announcements are associated with abnormal stock returns, indicating that credit watch actions are significant information events. Overall, our results support the hypothesis that credit watches enhance both the information-supplying role of credit rating agencies and the use of credit ratings in contracting.

Keywords: Credit watches, Credit rating agencies (CRAs), Bond ratings, Market impact, Contracting, Information supply

JEL Classification: G14, G24, G33

Suggested Citation

Chung, Kee H. and Frost, Carol Ann and Kim, Myungsun, Characteristics and Information Value of Credit Watches (October 11, 2011). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1321515

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Carol Ann Frost

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States
(940) 565- 3069 (Phone)
(940) 565-3803 (Fax)

Myungsun Kim

SUNY at Buffalo ( email )

Buffalo, NY 14260
United States
716-645-7900 (Phone)

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