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Is a Bond Rating Downgrade Bad News, Good News, or No News for Stockholders?
Author(s) -
GOH JEREMY C.,
EDERINGTON LOUIS H.
Publication year - 1993
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/j.1540-6261.1993.tb05139.x
Subject(s) - downgrade , shareholder , leverage (statistics) , business , bond , stock market , event study , stock (firearms) , credit rating , monetary economics , financial system , economics , finance , corporate governance , mechanical engineering , paleontology , context (archaeology) , computer security , horse , machine learning , computer science , engineering , biology
We examine the reaction of common stock returns to bond rating changes. While recent studies find a significant negative stock response to downgrades, we argue that this reaction should not be expected for all downgrades because: (1) some rating changes are anticipated by market participants and (2) downgrades because of an anticipated move to transfer wealth from bondholders to stockholders should be good news for stockholders. We find that downgrades associated with deteriorating financial prospects convey new negative information to the capital market, but that downgrades due to changes in firms' leverage do not.