The Long-Run Stock Returns Following Bond Ratings Changes
Posted: 3 Oct 2000
Using essentially all Moody's bond ratings changes between 1970 and 1997, we find no reliable abnormal returns following bond rating upgrades. However, we find negative abnormal returns on the magnitude of 10 to 14 percent in the first year following downgrades. Additional results reveal that this underperformance is especially pronounced for small, low credit quality firms. Also, downgrades underperform in nearly all years in the sample, and a large part of the abnormal returns occur at subsequent earnings announcements. Thus, the evidence suggests that the poor returns result from an underreaction to the announcement of downgrades, rather than from lower systematic risk.
Key Words: Bond ratings; Long-run returns; Market efficiency
JEL Classification: G14, G33
Suggested Citation: Suggested Citation