Salient News and the Stock Market Impact of Tone in Rating Reports
41 Pages Posted: 1 Jul 2016 Last revised: 4 Feb 2018
Date Written: February 3, 2018
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: Suggested Citation