Risk and Returns Around Bond Rating Changes: New Evidence from the Spanish Stock Market
Journal of Business Finance and Accounting
30 Pages Posted: 20 Apr 2005 Last revised: 3 Feb 2023
Date Written: October 25, 2004
Abstract
This study analyzes the effect of corporate bond rating changes over stock prices. We explore the effects over excess of returns and systematic risk. Rating changes by Moody's, Standard and Poor's or FitchIBCA are analyzed. On an efficient market, these changes will only have some effect if they contain some new information or if they are associated to a redistribution of wealth between shareholders and bondholders. We use an extension of the event study dummy approach. Our results indicate that rating downgrades do not cause abnormal returns around the date of the announcement while upgrades cause significantly negative effect. This behavior reflect a redistribution of wealh behavior. Changes of both directions cause a rebalancing effect in the total risk of the firm, with significant reductions on their systematic componet.
Keywords: Credit Rating Agencies, rating changes, event study, stock returns, event study dummy approach, systematic risk, SUR
JEL Classification: G12, G14, C34
Suggested Citation: Suggested Citation