Impact of Bond Rating Changes on Stock Prices in India : Rating Agency Wise Analysis
Keywords:
Abnormal Returns
, Average Abnormal Returns, Event Study, Credit Rating ChangesC12
, G14, G24Paper Submission Date
, October 1, 2015, Paper sent back for Revision, December 11, Paper Acceptance Date, December 25, 2015.Abstract
In this paper, we examined the impact of bond rating change announcement on the stock prices by computing the abnormal return of a security. The sample size of our study was 167 rating change announcements of four credit-rating agencies during the years 1991 to 2015. We used the event study methodology to estimate the expected return from a security. The study found average abnormal stock returns associated with the event, however, they were quite insignificant when tested with t -statistics, which revealed that credit ratings change announcements (either upgraded or downgraded news) carried a very minimal impact on the stock prices in the Indian context. The run test described that the average abnormal returns found occurred randomly.Downloads
Downloads
Published
How to Cite
Issue
Section
References
Barron, M.J., Clare, A.D., & Thomas, S.H. (1997). The effect of bond rating changes and new ratings on UK stock returns. Journal of Business Finance and Accounting, 24 (3), 497-509.
Brown, S. J., & Warner, J.B. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics, 14 (1), 3-31.
Camargos, M.A., & Barbosa, F.V. (2003). Estudo de evento: teoria e operacionalização. Cadernos de Pesquisa em Administração, 10 (3), 1-20.
Chandrashekar, R., & Mallikarjunappa, T. (2013). Impact of bond rating on stock returns. Paripex - Indian Journal of Research, 2(4), 263-267.
Chandrashekar, R., & Mallikarjunappa, T. (2013). The effect of initial bond rating on share price performance. International Journal of Scientific Research, 2 (6), 346-348. DOI : 10.15373/22778179
Choy, E., Gray, S., & Ragunathan, V. (2006). Effect of credit rating changes on Australian stock returns. Accounting and Finance, 46 (5), 755-769. DOI: 10.1111/j.1467-629X.2006.00192.x
Creighton, A., Gower, L., & Richards, A. (2007). The impact of rating changes in Australian financial markets. Pacific-Basin Finance Journal, 15(1), 1–17.
Dichev, I. D., & Piotroski, J. D. (2001). The long-run stock returns following bond ratings changes. Journal of Finance, 56 (1), 173-203. DOI: 10.1111/0022-1082.00322
Ee, B. C. B. (2008). The impact of credit watch and bond rating changes on abnormal stock returns for non-USA domiciled corporations (Master Thesis). Singapore Management University, Singapore. Retrieved from http://ink.library.smu.edu.sg/etd_coll/44
Goergen, M., & Renneboog, L. (2004). Shareholder wealth effects of European domestic and cross-border takeover bids. European Financial Management, 10 (1), 9-45. DOI: 10.1111/j.1468-036X.2004.00239.x
Goh, J.C.Y., & Ederington, L.H. (1993). Is a bond rating bad news, good news, or no news for stockholders? The Journal of Finance, 48 (5), 2001-2008.
Goh, J. C. Y., & Ederington, L. H. (1999). Cross sectional variation of the effect of bond rating changes on stock prices. The Quarterly Review of Economics and Finance, 39 (1), 101-112. DOI: 10.1016/s1062-9769(99)80006-4
Gupta, V. (2003). Announcement effects of bonus issues on equity prices: The Indian experience. Indian Journal of Finance and Research, 13 (1&2), 11-23.
Hand, J. R.M., Holtthausen, R.W., & Leftwich, R.W. (1992). The effect of bond rating agency announcement on bond and stock prices. The Journal of Finance, 47 (2), 733-752. DOI: 10.1111/j.1540-6261.1992.tb04407.x
Ingram, R.W., Brooks, L.D., & Copeland, R. M. (1983). The information content of municipal bond rating changes: A note. The Journal of Finance, 38 (3), 997-1003. DOI: 10.1111/j.1540-6261.1983.tb02514.x
Jorion, P., & Zhang, G. (2007). Information effects of bond rating changes: The role of the rating prior to the announcement. The Journal of Fixed Income, 16 (4), 45-59. doi: 10.3905/jfi.2007.683317
Klimaviciene, A. (2011). Sovereign credit rating announcements and baltic stock markets. Organizations and Markets in Emerging Economies, 1 (3), 51-62.
Kothari, S.P., & Warner, G. B. (1997). Measuring long-horizon security price performance. Journal of Financial Economics, 43 (3), 301-339.
Lal, J., & Mitra, M. (2011). Effect of bond rating on share prices: A study of select Indian companies. Vision, 15 (3), 231 - 238. doi: 10.1177/097226291101500303
Li, H., Visaltanachoti, N., & Kesayan, P. (2003). The effects of credit rating announcements on shares in the Swedish stock market. International Journal of Finance, 16 (1), 2872- 2896. DOI: http://worldcat.org/oclc/ 156161988
Liu, P., Seyyed, F. J., & Smith, S. D. (1999). The independent impact of credit rating changes - The case of Moody's rating refinement on yield premiums. Journal of Business Finance & Accounting, 26 (3/4), 337-363. DOI: 10.1111/1468-5957.00259
Merton, R.C. (1995). Financial innovation and the management and regulation of financial institutions. Journal of Banking and Finance, 19 (3/4), 461-481.
Micu, M., Remolona, E. M., & Wooldridge, P. (2004). The price impact of rating announcements: Evidence from the credit default swap market. BIS Quarterly Review, June 2004, 55-65. Retrieved from http://www.bis.org/publ/qtrpdf/r_qt0406e.pdf
Miroslav, M. (2008). The effect of sovereign credit rating announcements on emerging bond and stock markets: New evidences. Presented at the Oxford Business & Economics Conference (OBEC) organized by Association for Business and Economics Research (ABER), 2008. Retrieved from http://www.gcbe.us/2008_OBEC/data/confcd.htm
Mohindroo, A. (2008). The quality of credit rating by ICRA and Crisil (Doctoral Thesis). Panjab University, Chandigarh.
Pinches, E. G., & Singleton, J. C. (1978). The adjustment of stock prices to bond rating changes. The Journal of Finance, 33 (1), 29-44. DOI: 10.1111/j.1540-6261.1978.tb03387.x
Rao, N., & Ramachandran, V. (2004). Response of stock prices and volumes to bond rating changes: The Indian evidence. Presented at the International Conference on Business and Finance organized by ICFAI University, and Philadelphia University at Hyderabad, December 27 - 28, 2004.
Rao, S.V.D., & Sreejith, U. (2013). Impact of credit ratings (upgrade and downgrade) on stock prices in India. Proceedings of 23rd International Business Research Conference, held in Marriott Hotel, Melbourne, 18 - 20 November, 2013, Australia.
Ronald, J. G., & Bernard, S. B. (1995). The law and finance of corporate acquisitions. 2nd edition, 194-195.
Sharpe, W. F. (1963). A simplified model for portfolio analysis. Management Science, 9 (2), 277-293.
Steimer, M., & Heinke, V. G. (2001). Event study concerning international bond price effects of credit rating actions. International Journal of Finance & Economics, 6 (2), 139-157. DOI: 10.1002/ijfe.148
Venkatraman, K., & Selvam, M. (2014). Impact of corporate governance practices and firm performance: An empirical study. Indian Journal of Finance, 8 (12), 34-45. doi:10.17010//2014/v8i12/71691
Wakeman, L. M. (1990). The real function of bond rating agencies. In M. C. Jensen (ed.), The modern theory of corporate finance. New York : McGraw Hill.
Weinstein, M. (1977). The effect of a rating change announcement on bond price. Journal of Financial Economics, 5 (3), 329-350.
White, L. J. (2001). The credit rating industry: An industrial organization analysis. Retrieved from https://www.bis.org/bcbs/ca/lwhit.pdf
Zaima, J. K., & McCarthy, J. (1988). The impact of bond rating changes on common stocks and bonds: Test of the wealth redistribution hypothesis. Financial Review, 23 (4), 483-498. DOI: 10.1111/j.1540-6288.1988.tb01283.x
