Rating changes and the impact on stock prices

Baraccat, Bruno Borges; Bortoluzzo, Adriana Bruscato; Gonçalves, Adalto Barbaceia

doi:10.7819/rbgn.v22i0.4064

Bruno Borges Baraccat

Insper, São Paulo, Brazil E-mail: baraccatb@gmail.com AdrianaB@insper.edu.br AdaltoBG@insper.edu.br

http://orcid.org/0000-0003-0740-131X

Adriana Bruscato Bortoluzzo

Insper, São Paulo, Brazil E-mail: baraccatb@gmail.com AdrianaB@insper.edu.br AdaltoBG@insper.edu.br

http://orcid.org/0000-0003-2872-031X

Adalto Barbaceia Gonçalves

Insper, São Paulo, Brazil E-mail: baraccatb@gmail.com AdrianaB@insper.edu.br AdaltoBG@insper.edu.br

http://orcid.org/0000-0002-9861-2480

1.
Bruno Borges Baraccat, BA in Economics, Insper, São Paulo, Brazil.

2.
Adriana Bruscato Bortoluzzo, PhD in Statistics, Insper, São Paulo, Brazil.

3.
Adalto Barbaceia Gonçalves, PhD in Business Administration (Finance), Insper. São Paulo, Brazil.

Responsible editor:

Prof. Dr. Joelson Oliveira Sampaio

Contribution of each author

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Contribution Bruno Baraccat Adriana Bortoluzzo Adalto Gonçalves 1. Definition of research problem √ √ √ 2. Development of hypotheses or research questions ( empirical studies ) √ √ √ 3. Development of theoretical propositions ( theoretical Work ) √ √ √ 4. Theoretical foundation/ Literature review √ √ √ 5. Definition of methodological procedures √ √ √ 6. Data collection √ √ 7. Statistical analysis √ √ 8. Analysis and interpretation of data √ √ √ 9. Critical revision of the manuscript √ √ 10. Manuscript Writing √ √ √ 11. Other (please specify which)

	Final Rating
	AAA	AA	A	BBB	BB	B	CCC	CC	C, D
Initial Rating
AAA	0	0	0	0	0	0	0	0	0
AA	0	0	0	0	0	0	0	0	0
A	0	0	1	2	0	0	0	0	0
BBB	0	0	4	36	7	0	0	0	0
BB	0	0	2	24	59	5	0	0	0
B	0	0	0	0	9	7	0	0	0
CCC	0	0	0	0	1	2	2	0	0
CC	0	0	0	0	0	0	0	0	0
C, D	0	0	0	0	0	0	0	0	0

	Class downgrade	No class change	Class upgrade
Mean	-25,0%	3,2%	2,6%
Median	-21,7%	0,14%	8,0%
Minimum	-52,6%	-98,8%	-68,2%
Maximum	5,58%	99,8%	93,6%
Standard deviation	19,2%	33,7%	32,4%
Sample size	42	105	14
T-test statistics	-3,91***	1,01	0,49

Variable	Model 1			Model 2			Model 3
Variable	Coefficient		SE	Coefficient		SE	Coefficient		SE
Raises	-0,02173		0,0620				0,0131		0,0631
Lowers	-0,25519	***	0,0688				-0,2495	***	0,0813
Rating				0,7543	***	0,2455	0,6416	**	0,2737
Rating²				-0,0832	***	0,0245	-0,0733	***	0,0268
Intercept	0,004865		0,0320	-1,6755	***	0,6188	-1,3566	**	0,7033
n	159			159			159
R²	0,0321			0,0625			0,0921
adjusted R²	0,0187			0,0505			0,0686
F Test	2,50	*		5,20	***		5,92	***

Variable	Model 1		Model 2			Model 3
Variable	Coefficient	SE	Coefficient		SE	Coefficient		SE
Raises	-0,0075	0,0570				-0,0280		0,0529
Lowers	-0,1015	0,0818				-0,0435		0,0929
Rating			0,6432	***	0,4869	0,6253	**	0,2453
Rating²			-0,0594	***	0,0333	-0,0574	**	0,0242
Intercept	-0,0281	0,0254	-1,7256	***	1,4883	-1,6779	***	0,6150
n	161		161			161
R²	0,0076		0,0555			0,0582
adjusted R²	0,0049		0,0436			0,0341
F Test	0,61		4,64	***		4,48	***

Year	Authors	Data	Main results
1978	Pinches & Singleton	1959-72; Moody’s; 207 companies; monthly abnormal return between [-30,12]	Anticipation of the rating changes, there is no abnormal reaction after the announcement.
1982	Griffin & Sanvicente	1960-75; Moody’s and S&P; 180 rating changes; monthly abnormal return between [-11,1]	There is no anticipation, but there is a negative reaction after downgrades.
1986	Holthausen & Leftwich	1977-82; Moody’s and S&P; 1014 rating changes; 256 S&P Credit Watch additions; daily abnormal return between [-300,60]	Significant negative reaction after downgrades, not significant for upgrades.
1987	Glascock, Davidson, & Henderson	1977-81; Moody’s; 162 rating changes; daily abnormal return between [-90,90]	Significant negative abnormal return before and around downgrades, reversed after announcement.
1992	Hand, Holthausen, & Leftwich	1977-82 / 1981-83; Moody’s and S&P; 1100 rating changes and 250 S&P Credit Watch additions	Significant negative abnormal return for S&P Credit Watch downgrades and unexpected additions, no significant abnormal return for upgrades.
1993	Goh & Ederington	1984-86; Moody’s; daily abnormal return between [-30,30]	Significant negative abnormal return for downgrades due to profit deterioration, positive abnormal return for downgrades due to higher leverage.
1997	Followill & Martell	1985-88; Moody’s; 64 reviews and effective rating changes; daily abnormal return between [-5,5]	Significant negative feedback from downgrade revisions, negligible abnormal performance around effective downgrades.
2001	Dichev & Piotroski	1970-97; Moody’s; 4727 rating changes; abnormal daily return; long term	Significant negative abnormal return during the first month after a downgrade, there is no significant abnormal return for upgrades.
2003	Vassalou & Xing	1971-99; Moody’s; 5034 rating changes; abnormal monthly return on portfolios between [-36,36]	Stock returns on rating-related event studies should be adjusted for size, book-to-market, credit risk, and credit risk variance over the period; higher returns are associated with higher credit risks.
2004	Norden & Weber	2000-02; Moody’s, S&P, and Fitch; 166 reviews and 231 effective rating changes; daily abnormal return between multiple time intervals	Anticipation of downgrades; significant negative abnormal return after revisions for downgrades; past rating and rating following a change are significant in explaining the abnormal return.
2004	Linciano	1991-2003; Moody’s, S&P, and Fitch; 141 Credit Watch additions and 158 effective rating changes; daily abnormal return between [-20,20]	Significant abnormal returns following downgrades and Credit Watch additions to downgrades, apparently conditioned by the rating change.
2006	Jorion & Zhang	1996-2002; Moody’s and S&P; 2356 rating changes; daily abnormal return between [-3,3]	The effect of rating changes on the share price depends on the rating before and after the change, the effect being greater the lower the previous rating.
2008	Benjamin EE	1991-2007; Moody’s and S&P; 4039 rating changes and 3287 Credit Watch additions; daily abnormal return between [-1,1]	Significant long-term negative abnormal return for downgrades, but lower for emerging countries.
2013	Freitas & Minardi	2000-09; Moody’s and S&P; 221 rating changes and 49 Credit Watch additions; daily abnormal return between [-14,30]	Anticipation and significant negative abnormal return for downgrades, insignificant for upgrades.
2013	Avramov et al. (2013	1985-2008; 4953 observations; ranking of portfolio results composed of long-short strategy in price anomalies	Positive results in lower-rated short-selling strategies and these momentum gains are higher for lower-rated companies in monthly-adjusted strategies.
2014	Friewald et al.	2001-10; 491 firms using CDS spread change in default risk proxy	By forming portfolios buying companies with high credit risk and selling companies with low credit risk, we get a positive alpha after controlling for standard risk factors.

[1] 1.
Bruno Borges Baraccat, BA in Economics, Insper, São Paulo, Brazil.

Brasil

Brasil

Rating changes and the impact on stock prices

Abstract

Purpose:

Design/methodology/approach:

Findings:

Originality/value:

Contribution	Bruno Baraccat	Adriana Bortoluzzo	Adalto Gonçalves
1. Definition of research problem	√	√	√
2. Development of hypotheses or research questions ( empirical studies )	√	√	√
3. Development of theoretical propositions ( theoretical Work )	√	√	√
4. Theoretical foundation/ Literature review	√	√	√
5. Definition of methodological procedures	√	√	√
6. Data collection	√		√
7. Statistical analysis	√	√
8. Analysis and interpretation of data	√	√	√
9. Critical revision of the manuscript		√	√
10. Manuscript Writing	√	√	√
11. Other (please specify which)