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The Information Value of Bond Ratings
Author(s) -
Kliger Doron,
Sarig Oded
Publication year - 2000
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00311
Subject(s) - issuer , bond credit rating , bond , credit rating , debt , equity (law) , coupon , value (mathematics) , bond valuation , monetary economics , business , affect (linguistics) , equity value , financial economics , actuarial science , economics , credit risk , econometrics , finance , psychology , mathematics , statistics , external debt , law , communication , debt levels and flows , political science , credit reference
We test whether bond ratings contain pricing‐relevant information by examining security price reactions to Moody's refinement of its rating system, which was not accompanied by any fundamental change in issuers' risks, was not preceded by any announcement, and was carried simultaneously for all bonds. We find that rating information does not affect firm value, but that debt value increases (decreases) and equity value falls (rises) when Moody's announces better‐ (worse‐) than‐expected ratings. We also find that when Moody's announces better‐ (worse‐) than‐expected ratings, the volatilities implied by prices of options on the fine‐rated issuers' shares decline (rise).