Do Corporate Bond Rating Revisions Convey Information About Earnings?

31 Pages Posted: 6 Jul 2011 Last revised: 7 Aug 2011

See all articles by Steven T. Anderson

Steven T. Anderson

affiliation not provided to SSRN

Gurmeet S. Bhabra

University of Otago - Department of Accountancy and Finance

Harjeet S Bhabra

John Molson School of Business, Concordia University

Asjeet S. Lamba

University of Melbourne; Financial Research Network (FIRN)

Date Written: July 4, 2011

Abstract

We study the information content that corporate bond rating revisions convey regarding future earnings. Consistent with previous findings, we find that rating downgrades are associated with negative abnormal stock returns, while rating upgrades appear to be nonevents. For rating downgrades, earnings decline in the two years prior to and in the year of the rating downgrade announcement but increase in the year following the rating downgrade. While rating upgrades follow a period of rising earnings, they do not signal any increase in future earnings. These results, in conjunction with our multivariate regression results, indicate that rating agencies respond more to permanent changes in cash flows and provide little information, if any, about future cash flows.

Keywords: Bond rating revisions, Earnings information, Cash flow signaling hypothesis, Cash flow permanence hypothesis

JEL Classification: G10, G14

Suggested Citation

Anderson, Steven T. and Bhabra, Gurmeet S. and Bhabra, Harjeet S and Lamba, Asjeet S., Do Corporate Bond Rating Revisions Convey Information About Earnings? (July 4, 2011). Available at SSRN: https://ssrn.com/abstract=1878254 or http://dx.doi.org/10.2139/ssrn.1878254

Steven T. Anderson

affiliation not provided to SSRN ( email )

Gurmeet S. Bhabra

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin
New Zealand
64-3-4795124 (Phone)
64-3-8194 (Fax)

Harjeet S Bhabra

John Molson School of Business, Concordia University ( email )

Montreal, Quebec H3G 1M8
Canada

Asjeet S. Lamba (Contact Author)

University of Melbourne ( email )

Department of Finance
Faculty of Business and Economics
Parkville, Victoria 3010
Australia
(61 3) 8344-7011 (Phone)
(61 3) 8344-6914 (Fax)

HOME PAGE: http://www.finance.unimelb.edu.au/who/staffweb.cfm?StaffNo=7

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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