Do rating grades convey important information: German evidence?

Abstract

In this paper we investigate the impact of credit rating changes on German stock market. We evaluate daily abnormal stock returns of companies listed on the Frankfurt Stock Exchange (HDAX). Rating upgrades and downgrades are made by three rating agencies: Moody's, Standard and Poor's, and Fitch Ratings. We find that rating announcements are largely anticipated, i.e. German market adjusts stock prices long before the rating changes have been made. Additionally, we report that the market, along with anticipating the rating change, reacts stronger to downgrades compared to upgrades.

Supply chain finance: From traditional to supply chain credit rating

“…The second criticism is the timing with which the agencies provide a rating to a company. There is some evidence that the change in the rating of a company is quite slow (Altman and Rijken, 2004) and thus the market clearly anticipates the change of the rating of a company (Kenjegaliev et al, 2016).…”

The effect of oil price changes on the price of Russian and Chinese oil shares

“…Event study methodology involves estimating the normal return for a security and calculating the direction and size of the excess return attributable to unanticipated information. Econometric techniques used in event studies are provided by Warner (1980, 1985), Dyckman et al (1984), Jain (1986), Ball and Taurus (1988), Corrado (1989), Corrado and Zivney (1992), Kritzman (1994), McWilliams and Siegel (1997), Bartholdy et al (2007), Díaz and Jareno (2013), Liebman and Tomlin (2015) and Kenjegaliev et al (2016). The theory is still growing, and the number of economists researching in this area is increasing, along with the sophistication of studies.…”

Impact of Credit Ratings on Stock Returns

“…In contrast, recent studies document the price relevance of credit ratings. They use common (daily) stock prices to examine responses to bond rating changes (Poornima et al, 2015;Kenjegaliev et al, 2016). Their results show that bond downgrades by rating agencies are associated with negative abnormal stock returns, but there is little evidence of abnormal stock performance being associated with upgrade announcements.…”

“…A major anomaly is reported by Kenjegaliev et al (2016) analysing the impact of credit rating changes using German stock data. They show that the German stock market adjusts stock prices long before the rating change announcements are made.…”

“…Researchers investigating the effect of change in the US firm credit ratings (Holthausen and Leftwich, 1986;Dichev and Piotroski, 2001;Brune and Liu, 2010;Halek and Eckles, 2010;May, 2010;Galil and Soffer, 2011;He et al, 2011), European (Gärtner, Griesbach, and Jung, 2011;Urguiza, Navarro, and Trombetta, 2012;Bernoth, Von Hagen, and Schuknecht, 2012;Fatnassi, Ftiti, and Hasnaoui, 2014;Kenjegaliev, Duygun, and Mamedshakhova, 2016), and Australasian (Choy, Gray and Ragunathan,2006;Creighton, Gower, and Richards, 2007;Li, Jeon, and Chiang, 2008;El-Shagi, 2010;Bissoondoyal-Bheenick and Brooks, 2015;Poornima, Umesh, and Reddy, 2015) markets report mixed results, which suggests that the debate is not over and further investigation is required. Furthermore, there are only scant studies on whether current and potential investors have taken greater note of changes in credit ratings during or after the financial crisis period of 2008.…”