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

49 Pages Posted: 1 Jul 2016 Last revised: 29 Jul 2020

See all articles by Gunter Löffler

Gunter Löffler

Ulm University

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Alexander Rieber

University of Ulm

Date Written: July 28, 2020

Abstract

We investigate whether the stock market impact of tone in Moody’s rating reports depends on negative news. Reports convey negative news through negative rating actions (downgrades, reviews for downgrade or negative outlooks) or negative tone if there is no rating action. Using data from U.S. firms during 1995-2016, we find a significant short-term market impact of tone in reports with and without rating actions. The impact of tone is about five times stronger for negative rating actions but reversed in post-event time. The short-term impact of tone in reports with negative rating actions holds for different levels of investor attention and investor sentiment. The return reversal is driven by low-rated firms and stronger when sentiment is high and attention low. Finally, the predictability of future downgrades by tone is reduced for negative rating actions but not for reports without rating actions. The evidence is novel and indicates that negative news amplifies the market impact of tone and induces overreaction to negative rating actions.

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

JEL Classification: G10, G14, G20, D80

Suggested Citation

Löffler, Gunter and Norden, Lars and Rieber, Alexander, Negative News and the Stock Market Impact of Tone in Rating Reports (July 28, 2020). 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

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Alexander Rieber

University of Ulm ( email )

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
355
Abstract Views
2,641
rank
100,820
PlumX Metrics