The Stock Market Reaction to Changes to Credit Ratings of US-Listed Banks

Centre for Finance and Investment Discussion Paper Series DP2013-AEF03

British Accounting and Finance Association (BAFA) Scottish Area Group Conference, September 2013

44 Pages Posted: 28 Sep 2013 Last revised: 11 Oct 2013

Date Written: June 1, 2013

Abstract

In this paper we provide empirical evidence of abnormal returns associated with credit rating changes for a sample of 264 credit ratings announcements by 43 international and US banks between 2000 and 2012. The banks in the sample have either a primary or secondary US listing. We provide evidence using four models for estimating expected returns including the Fama-French Three-Factor model (1992). We find short-term negative abnormal returns are exhibited to downgrades and positive post-announcement abnormal returns are exhibited to both upgrades and downgrades. Cumulative abnormal returns exhibit a positive trajectory following an upgrade announcement whilst cumulative average abnormal returns to downgrades return almost to zero over our event window. In contrast to previous studies, we identify that concurrent announcements impact significantly on reported abnormal returns using our four models and hence we present our results after removal of contaminating effects. Whilst we are hampered by small subsamples in our test data, we are able to identify a significant difference between our subsamples for unanticipated and anticipated ratings announcements. We also provide evidence that US domestic banks experience significantly larger negative abnormal returns to downgrades than international banks listed in the US, which we attribute to the greater impact of a rating change of a US bank on the rest of the local economy. Finally, we report abnormal returns and significance for pre- and post- financial crisis samples, simultaneous and long-term only rating announcements, ratings within and across investment classes, and ratings which cross the investment grade line.

Keywords: Credit Ratings, Banks, Event Study, Three Factor Model

JEL Classification: G01, G14, G20, G21, G24

Suggested Citation

Jones, Edward A.E. and Mulet-Marquis, Quentin, The Stock Market Reaction to Changes to Credit Ratings of US-Listed Banks (June 1, 2013). Centre for Finance and Investment Discussion Paper Series DP2013-AEF03, British Accounting and Finance Association (BAFA) Scottish Area Group Conference, September 2013, Available at SSRN: https://ssrn.com/abstract=2331914 or http://dx.doi.org/10.2139/ssrn.2331914

Edward A.E. Jones (Contact Author)

Heriot-Watt University, Edinburgh ( email )

School of Management and Languages
Edinburgh EH14 4AS, Scotland
United Kingdom

Quentin Mulet-Marquis

Independent ( email )

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