Why Do CDO Downgrade Announcements Impact the Bank’s Share Price?

16 Pages Posted: 17 Mar 2012

See all articles by Anit Deb

Anit Deb

Darmstadt University of Technology

Dirk Schiereck

Darmstadt University of Technology

Date Written: March 15, 2012

Abstract

The collapse of the collateralized debt obligation (CDO) market brought attention to the soundness of the involved banks. We infer equity price reaction from rating announcements that are either negative rating outlooks or rating downgrades of CDO. To explain the market reactions, we consider rating shopping and rating grade inflation, reputation of rating agencies, sophisticated or trusting investor behavior and informational asymmetry. While these approaches are not mutually exclusive, our results indicate strong support for regime and time dependency of the sophisticated or trusting investor behavior and informational asymmetry. The trusting investor was dominant in times of market growth right before the outbreak of the financial crisis. This perception has changed so that the sophisticated investor is dominant. Even though rating announcements were expected, feedback channels exist that result in losses. When comparing the stock price reaction of bank related rating announcements, we find that the long term financial outlook is a decisive factor for the investor. As such, we take the bank’s issuer rating and perceive that price effects are well anticipated before the actual announcement day. We interpret the differing market reactions with the availability of information and refer this to an informational asymmetry issue.

Keywords: rating agencies, securitization, collateralized debt obligations, bank equity capital, event study

JEL Classification: G14, G20, G21

Suggested Citation

Deb, Anit and Schiereck, Dirk, Why Do CDO Downgrade Announcements Impact the Bank’s Share Price? (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2023685 or http://dx.doi.org/10.2139/ssrn.2023685

Anit Deb (Contact Author)

Darmstadt University of Technology ( email )

Hochschulstrasse 1
Darmstadt, Hesse D-64289
Germany

Dirk Schiereck

Darmstadt University of Technology ( email )

Universitaets- und Landesbibliothek Darmstadt
Magdalenenstrasse 8
Darmstadt, Hesse D-64289
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
62
Abstract Views
780
rank
359,090
PlumX Metrics