Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India

Abstract

We study the cross -sectional variation in stock price reaction to bond rating changes for India. Pre -event returns are significant for downgrades but not for upgrades implying that investors are able to anticipate bad news more than good news. Significant post -event abnormal returns are observed for rating upgrades suggesting the dominance of signalling effect. No post -event abnormal returns are seen in case of downgrades owing to anticipation and early investor reaction in the pre -event period. It was found that firm chacterstics do impact the relationship between bond rating changes and stock returns. Small size, low p/b, less liquid, high leverage, more intangible assets and less profitable companies tend to provide positive returns after downgrades implying wealth redistribution effect. They also generally provide positive post -upgrade returns indicating signalling effect. Analysing factors that influence post-rating performance one confirms negative relationship between pre and post downgrade returns as well as magnitude of rating change and post -downgrade returns. Our findings shall be highly useful for policy makers, credit rating agencies, investment analysts, bankers and academicians. The research contributes to bond rating and market efficiency literature for emerging markets.

Does Credit Rating Revisions Affect the Price of Common Stock: A Study of Indian Capital Market

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A study on the factors that governs US and EU YTM

“…During the 2008 world financial crisis, many institutions and private investors suffered from unreliable information that caused the world crisis to begin, which had a great effect on all economies worldwide (Sinclair and Timothy, 2010). Despite, the nature of the rating grades during 2008, the stock and bond returns are still having a significant correlation between the grades (Sehgal and Mathur, 2013).…”

Has the Global Financial Crisis Changed the Market Response to Credit Ratings? Evidence from an Emerging Market

“…The two related studies in India which analyse the impact of rating changes on stock prices (Lal & Mitra, 2011; Sehgal & Mathur, 2013) find conflicting results. Using a sample of 117 long-term instruments from 98 companies, rated by CRISIL, ICRA, CARE and FITCH during the period from April 2002 to March 2008, Lal and Mitra (2011) found evidence of negative abnormal returns post downgrades and no effect for upgrades.…”

“…Using a sample of 117 long-term instruments from 98 companies, rated by CRISIL, ICRA, CARE and FITCH during the period from April 2002 to March 2008, Lal and Mitra (2011) found evidence of negative abnormal returns post downgrades and no effect for upgrades. Sehgal and Mathur (2013) using 70 rating revisions by CRISIL and ICRA between November 2003 and February 2011 found evidence of significant pre-event returns for downgrades and post-event returns for upgrades.…”