Ratings, Commercial Paper, and Equity Returns

19 Pages Posted: 19 May 2006

See all articles by Nandkumar Nayar

Nandkumar Nayar

Lehigh University - College of Business & Economics

Michael S. Rozeff

SUNY at Buffalo - Department of Financial & Managerial Economics

Abstract

We present the first evidence that initial ratings of commercial paper influence common stock returns. Highly-rated industrial issues of commercial paper, unaccompanied by bank letters of credit, are associated with significantly positive abnormal returns; lower-rated issues are not. The stock price effects of changes in commercial paper ratings also demonstrate the relevance of ratings to the financing of firms. Rating downgrades, especially those that imply an exit from the commercial paper market, produce significantly negative abnormal returns; upgrades have no effects. Initial commercial paper ratings and subsequent re-ratings appear to help investors sort firms by their future prospects.

Keywords: Commercial paper, ratings, abnormal returns, letters of credit

JEL Classification: G14, G30, G32

Suggested Citation

Nayar, Nandkumar and Rozeff, Michael S., Ratings, Commercial Paper, and Equity Returns. Journal of Finance, Vol. 49, No. 4, September 1994. Available at SSRN: https://ssrn.com/abstract=903184

Nandkumar Nayar (Contact Author)

Lehigh University - College of Business & Economics ( email )

621 Taylor Street, Rauch Business Center
Lehigh University
Bethlehem, PA 18015-3117
United States
610-758-4161 (Phone)
610-758-6429 (Fax)

Michael S. Rozeff

SUNY at Buffalo - Department of Financial & Managerial Economics ( email )

Buffalo, NY 14260
United States

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