The Adverse Effects of Systematic Leakage Ahead of Official Sovereign Debt Rating Announcements

81 Pages Posted: 17 Dec 2011 Last revised: 16 Sep 2014

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andreas Milidonis

University of Cyprus - Department of Accounting and Finance

George Nishiotis

University of Cyprus - Department of Accounting and Finance

Panayiotis Papakyriacou

University of Cyprus - Department of Public and Business Administration

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Date Written: September 15, 2014

Abstract

Rating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes, making information leakage likely. Using cross-country data from 1988 to 2012, we find evidence of information leakage. In particular, we find statistically and economically significant negative daily abnormal stock index returns prior to downgrade announcements. These effects are more pronounced in countries with lower institutional quality, and persist during times with no downgrade rumors and no concurrent bad news in general. A mild post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage, and thus should be a policy concern for capital market regulators.

Keywords: sovereign ratings, event studies, institutional quality, information leakage, TRMI

JEL Classification: G14, G15, G24

Suggested Citation

Michaelides, Alexander and Milidonis, Andreas and Nishiotis, George and Papakyriacou, Panayiotis, The Adverse Effects of Systematic Leakage Ahead of Official Sovereign Debt Rating Announcements (September 15, 2014). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1973556 or http://dx.doi.org/10.2139/ssrn.1973556

Alexander Michaelides

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Andreas Milidonis (Contact Author)

University of Cyprus - Department of Accounting and Finance ( email )

P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 22 893 626 (Phone)

HOME PAGE: http://www.ucy.ac.cy/~amilidon/

George P. Nishiotis

University of Cyprus - Department of Accounting and Finance ( email )

1 University Avenue
P.O. Box 20537
Nicosia CY-1678
Cyprus
357 22893617 (Phone)
357 22895475 (Fax)

Panayiotis Papakyriacou

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS

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