The Impact of Sovereign Rating News on European Banks

Posted: 5 Aug 2013

See all articles by Stefano Caselli

Stefano Caselli

Bocconi University - Department of Finance

Gino Gandolfi

University of Parma

Maria-Gaia Soana

University of Parma

Date Written: August 4, 2013

Abstract

Although it is evident that sovereign rating is important for domestic banks, the impact of sovereign rating news on financial company shares has not yet been studied. This paper fills this gap by examining the spillover effect of Euro-zone sovereign rating changes announced by Standard and Poor’s, Moody’s, and Fitch on domestic bank share prices in the period 2002-2012. This spillover effect appears strongly negative in the case of downgrades, but insignificant for upgrades. Bank losses following sovereign downgrades are greater during the financial crisis of 2008 and in the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). Surprisingly, announcement of sovereign negative credit watches results in increased bank stock returns. Bank share price losses following sovereign downgrades increase as bank leverage, efficiency, and equity performance increase, and they decrease as bank systematic risk and payout ratio increase. On the contrary, bank share prices increase following sovereign negative credit watches, as leverage and bank size decrease and as bank systematic risk increases.

Keywords: sovereign rating change, European banks, event study, spillovers

JEL Classification: G14, G15, G21, G24

Suggested Citation

Caselli, Stefano and Gandolfi, Gino and Soana, Maria-Gaia, The Impact of Sovereign Rating News on European Banks (August 4, 2013). Available at SSRN: https://ssrn.com/abstract=2305821 or http://dx.doi.org/10.2139/ssrn.2305821

Stefano Caselli

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Gino Gandolfi

University of Parma ( email )

Via Kennedy,6
Parma, 43100
Italy

Maria-Gaia Soana (Contact Author)

University of Parma ( email )

Via Kennedy 6
Parma, 43100
Italy

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