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INTRA‐INDUSTRY EFFECTS OF BOND RATING ADJUSTMENTS
Author(s) -
Akhigbe Aigbe,
Madura Jeff,
Whyte Ann Marie
Publication year - 1997
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1997.tb00265.x
Subject(s) - downgrade , credit rating , earnings , valuation (finance) , bond , business , bond credit rating , stock (firearms) , monetary economics , economics , finance , credit risk , mechanical engineering , computer security , computer science , engineering , credit reference
Several studies find that bond rating downgrades cause negative valuation effects. Other studies find that signals conveyed by earnings releases, earnings forecasts, bankruptcies, and stock offerings of individual firms can be transmitted to their corresponding industries. By combining the two sets of studies, we hypothesize that bond rating changes may contain relevant information not only about the firm, but also about the corresponding industry. We find significantly negative valuation effects for rating downgrades, which are transmitted throughout the industry. Furthermore, we find that intra‐industry effects depend on particular characteristics of the bond downgrade, the downgraded firm, and industry rivals. Specifically, the negative intra‐industry effects are more pronounced when (1) the downgraded firm experiences a more severe share price response to the bond rating downgrade, (2) the downgraded firm is dominant in the industry, (3) the downgraded firm is more closely related to its rivals in the industry, and (4) the downgrade is due to a deterioration in the firm's financial prospects.