Market Reaction to Bond Downgradings Followed by Chapter 11 Filings

Keqian Bi and Haim Levy

Financial Management, 1993, vol. 22, issue 3

Abstract: Over time, the bond ratings of companies mired in financial difficulties are usually downgraded by rating agencies such as Standard & Poor's or Moody's, After the ratings are lowered, some companies slide down into the abyss of bankruptcy, while others survive by reorganization. Our study examines the impact of bond downgradings on the market, focusing on the sensitivity of the market, i.e., the change of stock prices, in detecting the likelihood of bankruptcy of companies which receive the same degree of bond downgradings. Our systematic and empirical approach, in which we introduce the concept of first consistent downgrading, is unique from previous studies on bond rating changes.

Date: 1993
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