Moody’s credit ratings and the stock market performance of Portuguese rated firms

Pacheco, Luís (2011): Moody’s credit ratings and the stock market performance of Portuguese rated firms.

Abstract

Never has the issue of sovereign credit ratings attracted such an interest by policy and opinion makers, bankers and journalists, or even the public opinion, as witnessed in the last couple of years. In spite of being accused of contributing to the instability of financial markets, credit rating agencies have undoubtedly a role in financial markets, affecting its performance and guiding investor’s decisions. This paper analyzes the impact of the announcement of changes in Moody’s ratings over the performance of a set of rated firms quoted in the Portuguese stock market. Following an event study methodology, we collect ratings and outlook announcements by that major credit agency over the period 2006-2011. We find a significant response of share prices to changes in ratings, with that response anticipating the announcement. We think that could be explained by previous sovereign rating changes or to the contagion effects of a bearish market. When analyzing the period after January 2010, we observe a stronger reaction to announcements, which is understandable given the greater influence and market sensitivity to rating agencies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit Rating Agencies, Event Studies, Stock Market, Moody’s, Sovereign Debt Crisis, Portugal
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies

References

Afonso, A.; Furceri, D. and Gomes, P. (2011), “Sovereign Credit Ratings and Financial Market Linkages”, Working Paper Series, European Central Bank, n. 1347.

Arezki, R.; Candelon, B. and Sy, A. (2011), “Sovereign Rating News and Financial Market Spillovers: evidence from the European Debt Crisis”; International Monetary Fund, Working Paper, n. 11/68.

Barron, M.J. ; Clare, A.D. and Thomas, S.H. (1997), “The Effect of Bond Rating Changes and New Ratings on UK Stock Returns”, Journal of Business Finance and Accounting, vol. 24, n. 3, pp. 497-509.

Brooks, R. ; Faff, R.B.; Hillier, D. and Hillier, J. (2004), “The National Market Impact of Sovereign Rating Changes”, Journal of Banking and Finance, vol. 28, pp. 233-250.

Brown, S. and J. Warner (1980), “Measuring Security Price Performance”, Journal of Financial Economics, vol. 8, pp. 205-258.

Dichev, I.D. and Piotroski, J.D. (2001), “The Long-run Stock Returns Following Bond Ratings Changes”, Journal of Finance, vol. LVI, n. 1, pp. 173-203.

Gande, A. and Parsley, D.C. (2005), “News Spillovers in the Sovereign Debt Market”, Journal of Financial Economics, vol. 75, n. 3, pp. 691-734.

Glascock, J.L.; Davidson, W.N. and Henderson, G.V. (1987), “Announcement Effects of Moody’s Bond Rating Changes on Equity Returns”, Quarterly Journal of Business and Economics, vol. 26, pp. 67-78.

Goh, J.C. and L.H. Ederington (1993), “Is a Bond Rating Downgrade Bad News, Good News, or no News for Stockholders?”, The Journal of Finance, vol. 48, n. 5, pp. 2001-2008.

Hand, J.R.; Holthausen, R.W. and Leftwich, R.W. (1992), “The Effect of Bond Rating Agency Announcements on Bond and Stock Prices”, Journal of Finance, vol. 47, pp. 733-752.

Joo, S.L. and Pruitt, S.W. (2006), “Corporate Bond Ratings Changes and Economic Instability: evidence from the Korean financial crisis”, Economic Letters, vol. 90, n. 1, pp. 12-20.

Kaminsky, G. and Schmukler, S. (2002), “Emerging Markets Instability: do sovereign credit ratings affect country risk and stock returns?”, World Bank Economic Review, n. 16, pp. 171-195.

Mora, N. (2006), “Sovereign Credit Ratings: guilty beyond reasonable doubt?”, Journal of Banking and Finance, n. 30, pp. 2041-2062.

Reinhart, C. (2001), “Do Sovereign Credit Ratings Anticipate Financial Crisis: evidence for emerging markets”, Journal of Finance, n. 52, pp. 2129-2144.

Reisen, H. and Maltzan, J. (1999), “Boom and Bust and Sovereign Ratings”, International Finance, vol. 2, pp. 273-293.

Subasi, F. (2008), “The Effect of Sovereign Rating Changes on Stock Returns and Exchange Rates”, International Research Journal of Finance and Economics, n. 20, pp. 46-54.

White, L. (2010), “Markets: the credit rating agencies”, Journal of Economic Perspectives”, n. 24(2), pp. 211-226.