Do rating agencies’ decisions impact stock risks? Evidence from European markets

Jérôme Hubler (), Christine Louargant (), Jean-Noël Ory () and Philippe Raimbourg
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Jérôme Hubler: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine
Christine Louargant: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine
Jean-Noël Ory: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine
Philippe Raimbourg: PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne

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Abstract: This article analyses the effect of rating agencies' decisions on stock risks for European issuers concerning five kinds of events. Our approach is an extension of dummy variable regression event study methodology, using a GARCH(1,1) estimation to capture simultaneously the impact on both systematic and specific stock risks. This new methodology allows us to obtain both global results by categories of rating decisions and individual results, event by event. We document, globally, a positive impact of upgrading on systematic risk, a negative impact of rating confirmation on specific risk, and no significant impact in all other cases. Regarding event-by-event results, the proportion of rating actions exhibiting a significant effect on risk is almost always observed between 20% and 30%. The weak evidence of a global effect on systematic risk may be due to the lack of informational content of the rating decisions on the stocks' risk, or the existence of rebalancing effects between systematic and idiosyncratic risks. Furthermore, it should be noticed that the decline in volatility in case of a rating affirmed is an insight of the certification role played by the agencies.

Keywords: rating agencies; rating changes stock prices; systematic risk; specific risk; DVR methodology; event study JEL Classification: G1; G14 (search for similar items in EconPapers)
Date: 2014
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Published in European Journal of Finance, 2014, 20 (11), pp.1008 - 1036. ⟨10.1080/1351847X.2013.815125⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01369861

DOI: 10.1080/1351847X.2013.815125

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