Credit Ratings and Stock Liquidity

45 Pages Posted: 23 Nov 2003

See all articles by Elizabeth R. Odders-White

Elizabeth R. Odders-White

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Mark Ready

University of Wisconsin Madison

Date Written: December 2003

Abstract

We analyze contemporaneous and predictive relations between debt ratings and measures of equity market liquidity, and find that common measures of adverse selection, which reflect a portion of the uncertainty about future firm value, are larger when debt ratings are poorer. This relation holds even after controlling for many other observable factors. We also show that ratings changes can be predicted using current levels of adverse selection, which suggests that credit rating agencies sometimes react slowly to new information. Collectively, our results offer new insights into the value of debt ratings, the specific nature of the information they contain, and the speed with which they reflect changes in uncertainty.

Suggested Citation

Odders-White, Elizabeth R. and Ready, Mark, Credit Ratings and Stock Liquidity (December 2003). Available at SSRN: https://ssrn.com/abstract=472223 or http://dx.doi.org/10.2139/ssrn.472223

Elizabeth R. Odders-White (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-1254 (Phone)
608-265-4195 (Fax)

Mark Ready

University of Wisconsin Madison ( email )

5274B Grainger Hall
975 University Ave
Madison, WI 53706
United States
6082625226 (Phone)

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