The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

Alexander Michaelides, Andreas Milidonis (), George Nishiotis and Panayiotis Papakyriakou

Journal of Financial Economics, 2015, vol. 116, issue 3, 526-547

Abstract: Rating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes, making information leakage likely. Using cross-country data from 1988 to 2012, we find evidence of information leakage. In particular, we find statistically and economically significant negative daily abnormal stock index returns prior to downgrade announcements. These effects are more pronounced in countries with lower institutional quality, and they persist during times with no downgrade rumors and no concurrent bad news in general. A mild post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage and, thus, should be a policy concern for capital market regulators.

Keywords: Sovereign ratings; Event studies; Institutional quality; Information leakage; TRMI (search for similar items in EconPapers)
JEL-codes: G14 G15 G18 G24 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:116:y:2015:i:3:p:526-547

DOI: 10.1016/j.jfineco.2014.12.005

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