The Long-Run Stock Returns Following Bond Ratings Changes

Posted: 3 Oct 2000

See all articles by Ilia D. Dichev

Ilia D. Dichev

Emory University - Department of Accounting

Joseph D. Piotroski

Stanford Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

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

Dichev, Ilia D. and Piotroski, Joseph D., The Long-Run Stock Returns Following Bond Ratings Changes. Journal of Finance. Available at SSRN: https://ssrn.com/abstract=238589

Ilia D. Dichev

Emory University - Department of Accounting ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Joseph D. Piotroski (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
2,257
PlumX Metrics