Good News, Bad News and Rating Announcements: An Empirical Investigation

54 Pages Posted: 17 Feb 2009 Last revised: 12 Apr 2011

See all articles by Koresh Galil

Koresh Galil

Ben-Gurion University of the Negev - Department of Economics

Gil Soffer

affiliation not provided to SSRN

Date Written: April 5, 2011

Abstract

In this paper we employ a new approach to test the contribution of information in rating announcements. This is the first study to test and corroborate how the CDS market responds to rating actions after controlling for the presence of concurrent public and private information. We show that since the clustering of rating announcements characterizes economically significant developments, the common practice of using “uncontaminated” samples underestimates market response. As in previous studies, we find that the market response to bad news is stronger than to good news. Nevertheless, bad news and negative rating announcements tend to cluster. Therefore, the residual contribution of negative rating announcements is small and in some cases insignificant. Positive rating announcements are less frequent and less clustered, though their residual contribution is still significant.

Keywords: Credit Default Swaps, Credit Risk, Credit Rating

JEL Classification: G14, G24, D8

Suggested Citation

Galil, Koresh and Soffer, Gil, Good News, Bad News and Rating Announcements: An Empirical Investigation (April 5, 2011). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1343719 or http://dx.doi.org/10.2139/ssrn.1343719

Koresh Galil (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
+972-8-6472310 (Phone)

Gil Soffer

affiliation not provided to SSRN ( email )

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