Big is Beautiful: The Information Content of Bank Rating Changes
The Journal of Risk Finance, Vol. 16 Iss 3 pp. 233 - 252.
Posted: 8 Jan 2014 Last revised: 14 Jan 2016
Date Written: December 10, 2013
We study the information content of about 3,300 global bank rating changes before and after the Lehman shock in September 2008 from an equity investor's perspective. Based on a multi-model event study approach, we find that while upgrades are not associated with significant abnormal bank stock returns, downgrades have a significantly negative effect. In addition, abnormal returns are more negative post-Lehman, and even when controlling for bank size, this effect is considerably stronger for small banks than for large banks. We conclude that large banks' stock prices seem to be to some extent insulated from negative rating information even post-Lehman due to an implicit "too big to fail" subsidy anticipated by equity investors.
Keywords: credit rating, event study, too big to fail, SIFI, multi-factor approach
JEL Classification: G14, G15, N2
Suggested Citation: Suggested Citation