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Recovery News

36 Pages Posted: 21 Nov 2015 Last revised: 28 Nov 2015

Claus Schmitt

Rotterdam School of Management

Date Written: November 19, 2015

Abstract

Whether credit rating agencies provide investors with private credit risk information is a central yet open empirical question. I use the introduction of a new rating type by Standard & Poor's reflecting expected recovery outcomes to isolate the effect of the information component in credit ratings on security prices. Studying the relationship between bond yield spreads and rating-implied recovery assessments, I find that bondholders welcome positive news about expected recovery rates. On the contrary, positive news about expected recovery rates lead to negative stock returns and an increase in implied volatilities of equity options. The results suggest that information in credit ratings is valuable to market participants.

Keywords: Credit rating, Recovery Rate, Recovery Rating

JEL Classification: G14, G12, G33

Suggested Citation

Schmitt, Claus, Recovery News (November 19, 2015). Available at SSRN: https://ssrn.com/abstract=2693322 or http://dx.doi.org/10.2139/ssrn.2693322

Claus Schmitt (Contact Author)

Rotterdam School of Management ( email )

United States

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