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The Long‐Run Stock Returns Following Bond Ratings Changes
Author(s) -
Dichev Ilia D.,
Piotroski Joseph D.
Publication year - 2001
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 - 10.1111/0022-1082.00322
Subject(s) - stock (firearms) , bond , earnings , monetary economics , economics , excess return , sample (material) , business , finance , mechanical engineering , paleontology , context (archaeology) , chemistry , chromatography , engineering , biology
Using essentially all Moody's bond ratings changes between 1970 and 1997, we find no reliable abnormal returns following upgrades. However, we find negative abnormal returns on the magnitude of 10 to 14 percent in the first year following downgrades. Additional results reveal that this underperformance is especially pronounced for small, low‐credit‐quality firms. Also, downgrades underperform in nearly all years in the sample, and a large part of the abnormal returns occur at subsequent earnings announcements. Thus, the evidence suggests that the poor returns result from an underreaction to the announcement of downgrades, rather than from lower systematic risk.