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The Effect of Bond Rating Changes and New Ratings on UK Stock Returns
Author(s) -
Barron M.J.,
Clare A.D.,
Thomas S.H.
Publication year - 1997
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00117
Subject(s) - credit rating , downgrade , bond credit rating , economics , volatility (finance) , stock (firearms) , agency cost , credit enhancement , bond , business , financial economics , monetary economics , credit risk , credit reference , financial system , finance , mechanical engineering , corporate governance , computer security , computer science , engineering , shareholder
This is the first study to use daily data from a major capital market outside of the US to examine the role of corporate bond and commercial paper rating changes on common stock returns. Using data published by Standard and Poors' credit rating agency between 1984 and 1992, we examine the impact of new credit ratings, credit rating changes and Credit Watch announcements on UK common stock returns. We find significant negative excess returns around the date of a downgrade and positive returns close to the date of a positive CreditWatch announcement. Hence, the financial markets would appear to place some importance on rating agency pronouncements in the UK. New ratings, whether short or long‐term, have no significant impact on returns. We also attempt to quantify the impact of a new credit rating upon firm cost of capital through measures of conditional volatility and systematic risk. However, we find only weak evidence to suggest that a stock's cost of capital is reduced after a long‐term credit rating is awarded for the first time.