The information content of issuer rating changes: Evidence for the G7 stock markets |
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| Institution: | 1. ZenTra – Center for Transnational Studies, Department of Business Administration, Economics, and Law, Carl von Ossietzky University of Oldenburg, D-26111 Oldenburg, Germany;2. Concordia University, John Molson School of Business, Department of Finance, Canada;3. Université du Luxembourg, Faculty of Law, Economics and Finance, Luxembourg;1. Department of Statistics, Keimyung University, 1095 Dalgubeol-daero, Daegu 704-701, Republic of Korea;2. Department of Business Administration, Sejong University, 209 Neungdong-ro Gwangjin-gu, Seoul 05006, Republic of Korea;1. Carlson School of Management, University of Minnesota, Minneapolis, MN55455, United States;2. School of Economics and Management, Tsinghua University, Beijing 100084, China;1. Zicklin School of Business, Baruch College, One Bernard Baruch Way, New York, NY 10010, USA;2. Adelphi University, 1 South Ave, New York, NY 11530, USA;1. Wisconsin School of Business, University of Wisconsin-Madison, 975 University Avenue, Madison, WI, 53706, USA;2. Fox School of Business, Temple University, 1801 Liacouras Walk, Philadelphia, PA, 19122, USA |
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| Abstract: | We study the firm-specific and intra-industry stock market effects of issuer credit rating changes and negative watch list placements for the G7 countries. We show that both the information content and the information transfer effects of these rating signals differ considerably in terms of magnitude and in terms of direction across the G7 countries. In particular, conditional on the type of rating change we find significant contagion effects for the US, the UK and Italy, but not for the other G7 countries. Moreover, we show that in some countries abnormal industry portfolio returns associated with rating downgrades and negative watch list signals tend to be more negative for more concentrated and more heavily levered industries. Overall, our results shed new light on country-specific differences in the relevance of credit ratings as risk indicators from an equity investor's perspective, and they may also be of interest to both risk managers and financial market supervisors striving to develop more accurate credit risk models and to better assess the systemic relevance of credit ratings. |
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