Price and Volume Effects Around Credit Rating Change Announcements: Evidence from India

Abstract

This article addresses the issue of the informational content of credit ratings by examining the effect of credit rating change announcements on the stock price and trading volume of Indian companies. Using the event study approach, abnormal return and abnormal volume are estimated around rating change announcements (upgrades and downgrades) during the period 1 April 2010 to 31 March 2021. The findings demonstrate a significant market reaction to rating change announcements. Negative (positive) abnormal returns are found around downgrade (upgrade) announcements, with downgrades prompting a more pronounced reaction than upgrades. The market is able to anticipate the rating change (pre-event reaction) in case of both upgrades and downgrades. Further, significant abnormal trading volume is observed around rating changes, with downgrade announcements again eliciting a stronger reaction, thereby shedding light on the information content of credit ratings and investor behaviour in the context of emerging markets. The magnitude of market reaction to changes in credit rating is also dependent on the rating agency’s size and reputation. The study has implications for portfolio management, investment strategies and stakeholder engagement and, therefore, of interest to investors, debt issuer firms and policymakers.