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

41 Pages Posted: 1 Jul 2016 Last revised: 4 Feb 2018

See all articles by Gunter Löffler

Gunter Löffler

University of Ulm - Department of Mathematics and Economics

Lars Norden

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

Alexander Rieber

University of Ulm

Date Written: February 3, 2018

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 their 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 reaction to the net tone in less salient reports. We further show that these effects hold for different levels of investor attention. 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 (February 3, 2018). Available at SSRN: https://ssrn.com/abstract=2802570 or http://dx.doi.org/10.2139/ssrn.2802570

Gunter Löffler

University of Ulm - Department of Mathematics and Economics ( 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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