Information Content of Credit Rating Affirmations

Abstract

We examine whether the reiteration of past credit ratings (i.e., credit rating affirmation) provides value-relevant information to equity analysts and stock investors. While a large body of accounting and finance research provides evidence on the informational role of credit rating downgrades and upgrades, the informational effects of credit rating affirmations remain unexplored, despite the fact that the frequency of issuing rating affirmations is 1.6 times greater than that of issuing both rating downgrades and upgrades. Using a sample of US corporate credit rating reports that reiterate the previous credit ratings over the period of April 1995-June 2018, we find that equity analysts' earnings forecast dispersion and stock return volatility-proxies for information uncertainty-decrease within a 30-day window following the credit rating affirmation announcements. The reduction in information uncertainty after rating affirmation is mainly driven by firms with non-investment grade bonds, whereas such reduction is not statistically significant for firms with investment grade bonds. We next find that the stock market reaction to affirmations is significantly positive on average and the positive reaction is most pronounced for firms with non-investment grade bonds.Taken together, our findings suggest that credit rating affirmations reduce information uncertainty and stock market investors find it useful for their investment decisions, particularly for firms with non-investment grade bonds. This study enhances our understanding of the non-trivial informational value of the credit rating affirmations for equity market participants.