Bond Price Reaction to Being Placed on Credit Review: Does Ownership Concentration Matter

Both financial academics and financial practitioners have explored the issue of how bond prices react to credit rating agency (CRA) ratings actions. While one would expect a positive price reaction if a bond is put on credit review for an upgrade and a negative price reaction if placed on review for a downgrade, the evidence has been choppy and mixed. Results were dependent on whether the bond issue was placed on review for an upgrade or downgrade and if the bond had a subsequent ratings change. The research issue to be addressed here relates to how bond ownership concentration relates to issuer monitoring intensity. Apriori, one would expect if the bond holdings of the issuer are concentrated, a rating review would have less of a price impact given the “ratings lag” (the time lag between the news that resulted in the ratings review). In other words, if, in fact concentrated holdings is indicative of monitoring intensity, a rating review would be viewed as “old news” and therefore not be as price impactful