The Impact of Sovereign Rating News on European Banks

26 Pages Posted: 21 Jan 2016

See all articles by Stefano Caselli

Stefano Caselli

Bocconi University - Department of Finance

Gino Gandolfi

University of Parma

Maria Gaia Soana

SDA Bocconi

Date Written: January 2016

Abstract

This paper examines the spillover effect of Eurozone sovereign rating changes announced by Standard and Poor's, Moody's, and Fitch on domestic bank share prices in the period 2002–2012. This spillover effect appears negative in the case of downgrades, but insignificant for upgrades. Surprisingly, announcement of sovereign negative credit watches results in increased bank stock returns. Bank share price losses following sovereign downgrades increase as bank leverage, efficiency, and equity performance increase, and they decrease as bank systematic risk and payout ratio increase. On the contrary, bank share prices rise following sovereign negative credit watches, as leverage and bank size decrease and as bank systematic risk increases.

Keywords: sovereign rating change, European banks, event study, spillovers

Suggested Citation

Caselli, Stefano and Gandolfi, Gino and Soana, Maria Gaia, The Impact of Sovereign Rating News on European Banks (January 2016). European Financial Management, Vol. 22, Issue 1, pp. 142-167, 2016. Available at SSRN: https://ssrn.com/abstract=2719293 or http://dx.doi.org/10.1111/eufm.12056

Stefano Caselli (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Gino Gandolfi

University of Parma ( email )

Via Kennedy,6
Parma, 43100
Italy

Maria Gaia Soana

SDA Bocconi ( email )

Via Bocconi 8
Milan, Milan 20136
Italy

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