The Adverse Effects of Systematic Leakage Ahead of Official Sovereign Debt Rating Announcements
81 Pages Posted: 17 Dec 2011 Last revised: 16 Sep 2014
Date Written: September 15, 2014
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: Suggested Citation