Rating Changes Across Europe

Abstract

How do European stocks react to rating actions issued by Rating Agencies using a Pan-European sample of more than 500 credit rating changes released by Moody’s in the period 2002-2007 we show that the reaction to rating changes is asymmetric. Downgrades negatively affect equity value and upgrades show no significant impact on stock prices. Moreover, we find that the prior credit quality and the magnitude of the rating change mitigate this asymmetry. The negative impact of downgrades is more intense in non-UK firms and for non-financial companies suggesting lower asymmetric information or higher disclosure in UK than in other European countries.

Keywords: rating changes, abnormal returns, event study

JEL Classification: G14, G15