The Impact of Bond Rating Changes on Corporate Bond Prices
Journal of Banking & Finance 34 (2010) 2822–2836
Contents lists available at ScienceDirect
Journal of Banking & Finance journal homepage: www.elsevier.com/locate/jbf
The impact of bond rating changes on corporate bond prices: New evidence from the over-the-counter market
Anthony D. May *
Price College of Business, University of Oklahoma, 307 West Brooks, Norman, OK 73019, USA
a r t i c l e
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a b s t r a c t
I study the information content of bond ratings changes using daily corporate bond data from TRACE. Abnormal bond returns over a two-day event window that includes the downgrade (upgrade) are negative (positive) and statistically significant, although the reaction to upgrades is economically small. Monthly abnormal bond returns around downgrades and upgrades are statistically significant but overstate the magnitude of the reaction relative to two-day abnormal returns. Unlike the bond market, the stock market reaction to upgrades is statistically insignificant. Evidence suggests that the differing inferences on the effect of upgrades in the two markets can be attributed to wealth transfer effects rather than relative market inefficiencies. In the cross-section, the bond market response is stronger for rating changes that appear more surprising, rating changes of lower rated firms, and upgrades that move the firm from speculative grade to investment grade. Ó 2010 Elsevier B.V. All rights reserved.
Article history: Received 29 August 2009 Accepted 10 June 2010 Available online 15 June 2010 JEL classification: G10 G14 G24 Keywords: Corporate bonds Bond prices Bond rating changes
‘‘The story of the credit-rating agencies is a story of colossal failure.” – Rep. Henry Waxman (California), Chairman of the House Committee. Wall Street Journal, October 23, 2008. ‘‘I never have bought any bonds over the last 28 years based upon the credit-agency ratings – they are always delayed on the upside or downside.” – Leslie Beck, certified Financial
Contents lists available at ScienceDirect
Journal of Banking & Finance journal homepage: www.elsevier.com/locate/jbf
The impact of bond rating changes on corporate bond prices: New evidence from the over-the-counter market
Anthony D. May *
Price College of Business, University of Oklahoma, 307 West Brooks, Norman, OK 73019, USA
a r t i c l e
i n f o
a b s t r a c t
I study the information content of bond ratings changes using daily corporate bond data from TRACE. Abnormal bond returns over a two-day event window that includes the downgrade (upgrade) are negative (positive) and statistically significant, although the reaction to upgrades is economically small. Monthly abnormal bond returns around downgrades and upgrades are statistically significant but overstate the magnitude of the reaction relative to two-day abnormal returns. Unlike the bond market, the stock market reaction to upgrades is statistically insignificant. Evidence suggests that the differing inferences on the effect of upgrades in the two markets can be attributed to wealth transfer effects rather than relative market inefficiencies. In the cross-section, the bond market response is stronger for rating changes that appear more surprising, rating changes of lower rated firms, and upgrades that move the firm from speculative grade to investment grade. Ó 2010 Elsevier B.V. All rights reserved.
Article history: Received 29 August 2009 Accepted 10 June 2010 Available online 15 June 2010 JEL classification: G10 G14 G24 Keywords: Corporate bonds Bond prices Bond rating changes
‘‘The story of the credit-rating agencies is a story of colossal failure.” – Rep. Henry Waxman (California), Chairman of the House Committee. Wall Street Journal, October 23, 2008. ‘‘I never have bought any bonds over the last 28 years based upon the credit-agency ratings – they are always delayed on the upside or downside.” – Leslie Beck, certified Financial
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