Rating Changes and Competing Information: Evidence on Publicly Traded Insurance Firms

Abstract

We examine the predictive ability of three competing sources of financial information—rating changes, profit changes, and excess stock returns. We find the following significant relations between current and lagged values of these three endogenous variables: (1) rating changes are positively related to past excess stock returns, (2) profit changes are positively related to past excess stock returns, and (3) profit changes and excess stock returns are mean reverting. In addition, profit changes are substantially more predictable than rating changes or excess stock returns, and past values of profit changes account for most of the observed ability to predict current profit changes. In contrast, past profit changes have little predictive ability in relation to excess stock returns or rating changes.