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.
Submission of an article implies that the work described has not been published previously (except in the form of an abstract or as part of a published lecture or academic thesis), that it is not under consideration for publication elsewhere, that its publication is approved by all authors and tacitly or explicitly by the responsible authorities where the work was carried out, and that, if accepted, will not be published elsewhere in the same form, in English or in any other language, without the written consent of the Publisher. The Editors reserve the right to edit or otherwise alter all contributions, but authors will receive proofs for approval before publication.
Copyrights for articles published in MTI journals are retained by the authors, with first publication rights granted to the journal. The journal/publisher is not responsible for subsequent uses of the work. It is the author's responsibility to bring an infringement action if so desired by the author.
