Credit ratings and the cross-section of stock returns |
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| Authors: | Doron Avramov Tarun Chordia Gergana Jostova Alexander Philipov |
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| Affiliation: | aRobert H. Smith School of Business, University of Maryland, USA;bGoizueta Business School, Emory University, USA;cSchool of Business, George Washington University, USA;dSchool of Management, George Mason University, Enterprise Hall 232, MSN 5F5, 4400 University Dr., Fairfax, VA 22030, USA |
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| Abstract: | Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints. |
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| Keywords: | Asset pricing Anomalies Credit ratings Credit risk |
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