An Analysis of the Information Content of Bond-Rating Changes: A Case of Differential Information

• Main Author: Pongspaibool, Nantaphol
• Format: Others
• Language: English
• Published: University of North Texas 1991
• Subjects: finance; bond-rating; United States stock prices; Bonds > Ratings and rankings > United States.; Stocks > Prices > United States.
• Online Access: https://digital.library.unt.edu/ark:/67531/metadc332706/

This dissertation examines the reaction of common stock prices to the announcement of changes in bond ratings by Moody's Bond Service, while having a control for differential information availability. The Institutional Brokers Estimate System (I/B/E/S) number of security analysts and coefficient of variation of earning per share (EPS) estimates are used as a proxy for information availability of the firms. Past studies differs in their conclusions as to whether the market has responded to announcement of bond rating changes. None of past studies have controlled for differential information availability. This study, using daily stock returns data and the event study methodology with the statistical test, finds that while the sample of rating downgrades exhibit significantly negative abnormal price effect during the announcement period, the magnitude of this effect is significantly higher for firms with low information availability. For the rating upgrades, the sample as a whole has no abnormal announcement period returns, but the sample of firms with lower information earns significantly positive abnormal returns. This study provides support for the hypothesis that the announcement effect of bond-rating changes is conditional on the information available about the firm.