STOCK MARKET REACTION TO ANTICIPATED VERSUS SURPRISE RATING CHANGES

Lynnette D. Purda

Journal of Financial Research, 2007, vol. 30, issue 2, 301-320

Abstract: I examine whether bond rating changes can be anticipated by investors and test whether the stock price reaction to the eventual change varies as a result. All else equal, the market reaction to changes that could have been easily predicted should be significantly smaller than the reaction to changes that are largely a surprise. Although rating upgrades prove difficult to predict, approximately 20% of downgrades can be correctly predicted using a relatively small number of publicly available variables. There is no significant difference between the stock price reaction to anticipated versus unanticipated rating changes.

Date: 2007
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