36 Pages Posted: 21 Nov 2015 Last revised: 28 Nov 2015
Date Written: November 19, 2015
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: Suggested Citation