Market Anticipation And The Effect Of Bond Rating Changes On Common Stock Prices

The effect of credit rating revisions on common stock prices is examined by taking into account the market anticipation of bond rating changes. Empirical findings show that the effect of bond rating change announcements varies across firms and over time, depending on the quantity of information available at the time of announcements. In both rating downgrades and upgrades, there are significant abnormal stock price movements in response to a rating change for firms with less information available in the market. Furthermore, rating change effects are more pronounced when market conditions are less certain, indicating that rating change announcements are less likely to be anticipated, and hence convey more information when the market as a whole is in greater need of information. © 1992