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The Risk-Return binomial after rating changes

Pilar Abad and M. Dolores Robles Fernandez

No 2014-23, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: Risk-averse investors take into consideration risk-return tradeoff for decide their new position after the release of relevant information. This paper analyzes the informational content of rating change announcements focusing on the joint reaction they cause on the risk-return binomial. Our purpose is to identify the main factors that signal which announcements are informative. To do that we estimate a binomial logit model for the probability of informative content of credit rating announcements. We analyze a sample of rating events affecting Spanish listed firms from 2000 to 2010. Empirical results show significant differences in the informative content between positive and negative rating events. For both kinds of announcements, we find higher informative content when agencies agree about the new level of solvency, whereas those affecting high covered firm that operate in highly regulated sectors are the less informative. Other factors as the presence of a previous rating refinements or trends in the credit quality reveals different information depending on the direction of the rating event. Finally, we find the announcements after de crisis disclose less information, suggesting a loss of reputation of CRAs.

Keywords: Abnormal return; Abnormal systematic risk; Abnormal volatility; Logit model. (search for similar items in EconPapers)
JEL-codes: C22 G12 G14 G24 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2014-07
New Economics Papers: this item is included in nep-dcm and nep-rmg
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Journal Article: The Risk–Return Binomial After Rating Changes (2015) Downloads
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