The Impact of Bond Rating Changes on Corporate Bond Prices: New Evidence from the Over-the-Counter Market

47 Pages Posted: 9 Mar 2012

See all articles by Anthony D. May

Anthony D. May

Wichita State University - W. Frank Barton School of Business

Date Written: November 1, 2010

Abstract

I study the information content of bond ratings changes using daily corporate bond data from TRACE. Abnormal bond returns over a two-day event window that includes the downgrade (upgrade) are negative (positive) and statistically significant, although the reaction to upgrades is economically small. Monthly abnormal bond returns around downgrades and upgrades are statistically significant but overstate the magnitude of the reaction relative to two-day abnormal returns. Unlike the bond market, the stock market reaction to upgrades is statistically insignificant. Evidence suggests that the differing inferences on the effect of upgrades in the two markets can be attributed to wealth transfer effects rather than relative market inefficiencies. In the cross-section, the bond market response is stronger for rating changes that appear more surprising, rating changes of lower rated firms, and upgrades that move the firm from speculative grade to investment grade.

Keywords: Corporate bonds, Bond prices, Bond rating changes

JEL Classification: G10, G14, G24

Suggested Citation

May, Anthony D., The Impact of Bond Rating Changes on Corporate Bond Prices: New Evidence from the Over-the-Counter Market (November 1, 2010). Journal of Banking and Finance, Vol. 34, pp. 2822-2836, 2010, Available at SSRN: https://ssrn.com/abstract=2018835

Anthony D. May (Contact Author)

Wichita State University - W. Frank Barton School of Business ( email )

1845 N. Fairmount
Wichita, KS 67260
United States

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