Salient News and the Stock Market Impact of Tone in Rating Reports

45 Pages Posted: 1 Jul 2016 Last revised: 29 Apr 2019

See all articles by Gunter Löffler

Gunter Löffler

Ulm University

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Alexander Rieber

University of Ulm

Date Written: April 26, 2019

Abstract

We investigate whether the stock market impact of tone in Moody’s rating reports depends on their salience to investors. We consider reports as salient when they cover negative rating actions (downgrades, reviews for downgrade or negative outlooks) or when the tone is predominantly negative. Using a comprehensive sample of U.S. firms during 1995-2016, we find a significant short-term market impact of net tone in salient reports followed by a significant reversal. There is no significant short-term reaction to the net tone in less salient reports. We further show that the short-term effect of salient reports holds for different levels of investor attention and investor sentiment. The subsequent reversal is mainly driven by low-rated firms and stronger when sentiment is high and attention low. Finally, the salience of reports does not systematically affect the predictability of future firm outcomes by net tone. The evidence is novel and suggests that investors overreact to the net tone of rating reports depending on their salience.

Keywords: Credit rating, salient news, overreaction, underreaction, textual analysis

JEL Classification: G10, G14, G20, D80

Suggested Citation

Löffler, Gunter and Norden, Lars and Rieber, Alexander, Salient News and the Stock Market Impact of Tone in Rating Reports (April 26, 2019). Available at SSRN: https://ssrn.com/abstract=2802570 or http://dx.doi.org/10.2139/ssrn.2802570

Gunter Löffler

Ulm University ( email )

Helmholzstrasse
Ulm, D-89081
Germany
+49 731 50 23598 (Phone)
+49 731 50 23950 (Fax)

Lars Norden (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Alexander Rieber

University of Ulm ( email )

Helmholzstrasse
Ulm, D-89081
Germany
+49 731 50 23591 (Phone)

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