Do Bond Rating Changes Affect Information Risk of Stock Trading?

41 Pages Posted: 1 Mar 2007

See all articles by Yan He

Yan He

Indiana University Southeast - School of Business

K.C. John Wei

Hong Kong Polytechnic University

Junbo Wang

Dept. of Economics and Finance, City Univ. of HK

Date Written: January 18, 2007

Abstract

Using a sample of 279 upgrades and 310 downgrades from 1996 to 2004, we find that bond rating changes affect asymmetric information of stock trading and other measures of information risk. More specifically, when a firm's bond rating is upgraded (downgraded), its stock information asymmetry and its analysts' earnings forecast dispersion are significantly reduced (increased), while the institutional equity holdings of its shares are significantly increased (reduced). In addition, the degree of the change in stock asymmetric information is positively associated with the magnitude of the bond rating changes. Our evidence supports the hypothesis that a firm's bond rating change influences investors' perceptions of the firm's disclosure level, which, in turn, affects the information asymmetry of its stock trading and other measures of information risk.

Keywords: Bond rating changes; Information asymmetry; Information risk

JEL Classification: G10

Suggested Citation

He, Yan and Wei, Kuo-Chiang (John) and Wang, Junbo, Do Bond Rating Changes Affect Information Risk of Stock Trading? (January 18, 2007). Available at SSRN: https://ssrn.com/abstract=966691 or http://dx.doi.org/10.2139/ssrn.966691

Yan He

Indiana University Southeast - School of Business ( email )

4201 Grant Line Road
New Albany, IN 47150
United States
812-941-2308 (Phone)
812-941-2672 (Fax)

Kuo-Chiang (John) Wei (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Junbo Wang

Dept. of Economics and Finance, City Univ. of HK ( email )

83 Tat Chee Ave., Kowloon Tong
Kowloon Town
Kowloon, 220
Hong Kong
34429492 (Phone)
852-2788-8806 (Fax)

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