The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

Abstract

a b s t r a c tRating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes, making information leakage likely. Using cross-country data from 1988 to 2012, we find evidence of information leakage. In particular, we find statistically and economically significant negative daily abnormal stock index returns prior to downgrade announcements. These effects are more pronounced in countries with lower institutional quality, and they persist during times with no downgrade rumors and no concurrent bad news in general. A mild post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage and, thus, should be a policy concern for capital market regulators.

Financial firm bankruptcies, international stock markets, and investor sentiment

“…We generate our results using a short-horizon event-study analysis, a method regarded as straightforward and trouble-free (Kothari & Warner, 2007). In order to estimate robust results, we adapt the methodology in Michaelides, Milidonis, Nishiotis, and Papakyriakou (2015) to the standards of this paper.…”

Cyprus: from boom to bail-in

“…There were many instances of the 'bail-in' being discussed internationally in the last three months before it actually occurred, implying that many deposits (usually from more sophisticated depositors) fled the banking system. Michaelides et al (2014) emphasize the destabilizing consequences that leakage can have ahead of official sovereign debt downgrade announcements. The original motivation in that study comes from Cyprus, where the stock market fell around 30% in the ten days before Fitch downgraded Cyprus's sovereign debt by two notches in August 2011.…”

The impact of terrorist attacks in G7 countries on international stock markets and the role of investor sentiment

“…As a first step, we implement a short-horizon event-study analysis, an approach regarded as straightforward and trouble-free (Kothari and Warner, 2007). To ensure the robustness of our results, we adapt the steps in Michaelides et al (2015) to the standards of our study. We estimate 12 the Capital Asset Pricing Model (CAPM) using country stock market returns as the dependent variable and the world market returns as the independent variable.…”

“…Prior literature on event-studies has devised ways of correctly measuring the effect from events occurring close to one another timewise. For instance, Michaelides et al (2015Michaelides et al ( , 2018, who explore the effect of sovereign rating downgrades on stock and foreign exchange markets, filter out those events that supersede other (same type of) events for a period of 21 trading days (one calendar month). In this manner the authors isolate the pure effect of events because, as they argue, followup events are not as impactful as the ones preceding them.…”