Salient News and the Stock Market Impact of Tone in Rating Reports
45 Pages Posted: 1 Jul 2016 Last revised: 29 Apr 2019
Date Written: April 26, 2019
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
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