Information Transfer Effects of Bond Rating Downgrades

Philippe Jorion and Gaiyan Zhang

The Financial Review, 2010, vol. 45, issue 3, 683-706

Abstract: This paper investigates information transfer effects of bond rating downgrades measured by equity abnormal returns for industry portfolios. Industry rivals can be subject to two opposing effects, the contagion effect and the competition effect. We find that the net effect is strongly dependent on the original bond rating of the downgraded firm. For investment‐grade (speculative‐grade) firms, industry abnormal equity returns are negative (positive), which implies a predominant contagion (competition) effect. The analysis reveals a rich pattern of positive and negative correlations across negative credit events, which can be used to improve our understanding of portfolio credit risk models.

Date: 2010
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https://doi.org/10.1111/j.1540-6288.2010.00266.x

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