The Price Impact of Rating Announcements: Which Announcements Matter?
31 Pages Posted: 20 Sep 2007
Date Written: June 2006
Credit rating agencies make multiple announcements, some of which are intended to reflect the latest information available about a firm and others of which are intended to provide a stable signal of credit quality. Using data on CDS spreads, we examine which of these different types of rating announcements contains pricing-relevant information. We find that all types, including changes in outlook, have a significant impact on CDS spreads. Even rating announcements preceded by similar announcements have an impact. The price impact is greatest for firms with split ratings, smallcap firms and firms rated near the threshold of investment grade.
Keywords: Credit default swaps, credit ratings, event study, market reaction
JEL Classification: G14
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