Do Credit Rating Agencies Sacrifice Timeliness by Pursuing Rating Stability? Evidence from Equity Market Reactions to CreditWatch Events

In this paper we examine how well CreditWatch is used by credit rating agencies to balance two conflicting goals: rating timeliness and rating stability. Examining equity market reactions around CreditWatch events in 2002-2005, we find evidence that while CreditWatch has improved rating timeliness, its intended purpose has not been completely achieved. Equity prices start to change days before companies are listed on CreditWatch and abnormal equity returns of firms prior to being listed on CreditWatch are effective predictors of the ultimate change in ratings. The findings in the study suggest that in the pursuit of rating stability, rating agencies may have sacrificed rat-ing timeliness