• Krishna Reddy Toi Ohomai Institute of Technology
  • Rudi Bosman WINTEC
  • Nawazish Mirza S P Jain School of Global Management
Keywords: Credit rating, Firms, Stock returns, Global financial crisis


This study investigates whether a change in credit ratings lead to a change in dailyexcess stock returns. The sample includes daily stock price data for US firms listedon the Standard & Poor’s 500 from January 2006 to December 2015. Firms’ excessstock returns are compared with the market in a 14-day window around credit ratingdowngrades and upgrades. Our results are asymmetric, that is, there is a significantreaction to credit ratings downgrades but not to upgrades. In addition, we report weakevidence of upgrades in credit ratings since the 2008 global credit crisis leading tosignificant changes in security prices.


Download data is not yet available.


Allen, F., & Carletti, E. (2010). An Overview of the Crisis: Causes, Consequences,
and Solutions. International Review of Finance, 10, 1-26.
Alsakka, R., & ap Gwilym, O. (2012). Foreign Exchange Market Reactions to
Sovereign Credit News. Journal of International Money and Finance, 31, 845-864.
Alsakka, R., & ap Gwilym, O. (2013). Rating Agencies’ Signals During the European
Sovereign Debt Crisis: Market Impact and Spillovers. Journal of Economic
Behavior & Organization, 85, 144-162.
Apergis, N., Payne, J. E., & Tsoumas, C. (2012). The Impact of Credit Rating
Changes on U.S. Banks. Banking and Finance Review, 4, 1-16.
Arner, D. W. (2009). The Global Credit Crisis of 2008: Causes and Consequences.
International Lawyer, 43, 91-136.
Avramov, D., Chordia, T., Jostova, G., & Philipov, A. (2009). Credit Ratings and the
Cross-Section of Stock Returns. Journal of Financial Markets, 12, 469-499.
Bae, K.-H., Lim, C., & Wei, K. C. (2006). Corporate Governance and Conditional
Skewness in the World’s Stock Markets. Journal of Business, 79, 2999-3028.
Ball, R., & Brown, P. (n.d.). An Empirical Evaluation of Accounting Numbers.
Journal of Accounting Research, 6, 159-178.
Bernoth, K., Von Hagen, J., & Schuknecht, L. (2012). Sovereign Risk Premiums
in the European Government Bond Market. Journal of International Money and
Finance, 31, 975-995.
Broto, C., & Molina, L. (2016). Sovereign Ratings and Their Asymmetric Response
to Fundamentals. Journal of Economic Behavior & Organization, 206-224.
Brown, S. J., & Warner, J. B. (1985). Using Daily Stock Returns: The Case of Event
Studies. Journal of Financial Economics, 14, 3-31.
Brune, C., & Liu, P. (2010). The Contagion Effect of Default Risk Insurer
Downgrades: The Impact on Insured Municipal Bonds. Journal of Economics
and Business, 63, 492-502.
Burrell, G., & Morgan, G. (1979). Sociological Paradigms and Organizational Analysis.
London: Heinemann Books.
Campbel, J. Y., Lo, A. W., & MacKinlay, G. A. (1996). The Econometrics of Financial
Markets. New Jersey: Princeton University Press.
Cantor, R., & Packer, F. (1994). The Credit Rating Industry. Federal Reserve Bank of
New York Quarterly Review, 19, 1-26.
Chen, J., Hong, H., & Stein, J. C. (2001). Forecasting Crashes: Trading Volume,
Past Returns, and Conditional Skewness in Stock Prices. Journal of Financial
Economics, 61, 345-381.
Choy, E., Gray, S., & Ragunathan, V. (2006). Effect of Credit Rating Changes on
Australian Stock Returns. Accounting and Finance, 46, 755-769.
Corner, J. L. (2013). Action Research. Action Research PowerPoint Presentation.
Hamilton, Waikato, New Zealand: University of Waikato.
Corner, J. L. (2013). Case Study Research. Case Study Research PowerPoint
Presentation. Hamilton, Waikato, New Zealand: University of Waikato.
Corner, J. L. (2013). Ethnography. Ethnography PowerPoint Presentation. Hamilton,
Waikato, New Zealand: University of Waikato.
Corwin, S. A., & Lipson, M. L. (2000). Order Flow and Liquidity around NYSE
Trading Halts. Journal of Finance, 55, 1771-1801.
Diamond, D. W., & Rajan, R. (2009). The Credit Crises: Conjectures about the
Causes and Remedies. National Bureau of Economic Research.
Dichev, I. D., & Piotroski, J. D. (2001). The Long-Run Stock Returns Following
Bond Ratings Changes. The Journal of Finance, 56, 173-203.
El-Shagi, M. (2010). The Role of Rating Agencies In Financial Crises: Event Studies
From The Asian Flu. Cambridge Journal of Economics, 34, 671-685.
Erlenmaier, U. (2011). The Shadow Rating Approach: Experience from Banking
Practice. In B. Engelmann, & R. Rauhmeier, The Basel II Risk Parameters:
Estimation, Validation, Stress Testing With Applications to Loan Risk Management
(2nd ed., 37-74). New York and Heidelberg: Springer.
Fama, E. F., Fisher, L., Jensen, M. C., & Roll, R. (1969). The Adjustment of Stock
Prices to New Information. International Economic Review, 10, 1-21.
Fatnassi, I., Ftiti, Z., & Hasnaoui, H. (2014). Stock Market Reactions to Sovereign
Credit Rating Changes: Evidence from Four European Countries. The Journal
of Applied Business Research, 30, 953-958.
Fitch Ratings. (2013, February). Retrieved April 6, 2013, from Fitch Ratings Web site:
Freitas, N. A., & Minardi, A. M. (2013). The Impact of Credit Rating Changes in
Latin American Stock Markets. Brazilian Administration Review, 10, 439-461.
Galai, D., Kedar-Levy, H. Z., & Schreiber, B. (2008). Seasonality in Outliers of
Daily Stock Returns: A Tail That Wags the Dog? International Review of Financial
Analysis, 17, 784-792.
Galil, K., & Soffer, G. (2011). Good News, Bad News and Rating Announcements:
An Empirical Investigation. Journal of Banking & Finance, 35, 3103-3119.
Gärtner, M., Griesbach, B., & Jung, F. (2011). PIGS or Lambs? The European
Sovereign Debt Crisis and the Role of Rating Agencies. International Advances
in Economic Research , 17, 288-299.
Gensuk, M. (2003). A Synthesis of Ethnographic Research. Occasional Papers Series
- Center for Multilingual, Multicultural Research. Los Angeles, United States of
Amercia: University of Southern California.
Gonzalez, F., Haas, F., Johannes, R., Persson, M., Toledo, L., Violi, R., . . . Zins, C.
(2004). Market Dynamics Associated with Credit Ratings: A Literature Review.
Banque de France Financial Stability Review, 53-76.
Halek, M., & Eckles, D. L. (2010). Effects of Analysts’ Ratings on Insurer Stock
Returns: Evidence of Asymmetric Responses. The Journal of Risk and Insurance,
77, 801-827.
Hand, J. R., Holthausen, R. W., & Leftwich, R. W. (1992). The Effect of Bond Rating
Agency Announcements on Bond and Stock Prices. The Journal of Finance, 47,
He, Y., Wang, J., & Wei, J. K. (2011). Do Bond Rating Changes Affect the Information
Asymmetry of Stock Trading? Journal of Empirical Finance, 18, 103-116.
Holthausen, R. W., & Leftwich, R. W. (1986). The Effect of Bond Rating Changes on
Common Stock Prices. Journal of Financial Economics, 17, 57-89.
Hudson, R. S., & Gregoriou, A. (2015). Calculating and Comparing Security
Returns is Harder Than You Think: A Comparison Between Logarithmic and
Simple Returns. International Review of Financial Analysis, 38, 151-162.
Hughson, E., Stutzer, M., & Yung, C. (2006). The Misuse of Expected Returns.
Financial Analysis Journal, 62, 88-96.
Johansson, R. (2003). Methodologies in Housing. Methodologies in Housing Research.
Stockholm: Royal Institute of Technology - Stockholm.
Jorion, P. (2001). Value at Risk: The New Benchmark for Managing Financial Risk (3rd
ed.). New York: McGraw-Hill.
Kenjegaliev, A., Duygun, M., & Mamedshakhova, D. (2016). Do Rating Grades
Convey Important Information: German Evidence? Economic Modelling, 53,
Kim, Y., Kim, T.-H., & Ergun, T. (2015). The Instability of the Pearson Correlation
Coefficient in the Presence of Coincidental Outliers. Finance Research Letters,
13, 243-257.
Kryzanowski, L., & Nemiroff, H. (2001). Market Quote and Spread Component
Cost Behavior Around Trading Halts for Stocks Interlisted on the Montreal
and Toronto Stock Exchanges. Financil Review, 36, 115-138.
Lenell, W., & Boissoneau, R. (1996). Using Causal-Comparitive and Correlational
Designs in Conducting Market Research. Journal of Professional Services
Marketing, 13, 59-69.
Li, H., Jeon, B. N., Cho, S.-Y., & Chiang, T. C. (2008). The Impact of Sovereign
Rating Changes and Financial Contagion on Stock Market Returns: Evidence
from Five Asian Countries. Global Finance Journal, 19, 46-55.
Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky
Investments in Stock Portfolios and Capital Budgets. Review of Economics &
Statistics, 47, 13-37.
Lui, D., Markov, S., & Tamayo, A. (2012). Equity Analysts and the Market’s
Assessment of Risk. Journal of Accounting Research, 50, 1287-1317.
MacKinlay, G. A. (1997, March). Event Studies in Economics and Finance. Journal
of Economic Literature, 35, 13-39.
Matthies, A. B. (2013). Empircal Research on Corporate Credit Ratings A Literature
Review. 28.
May, A. D. (2010). The Impact of Bond Rating Changes on Corporate Bond Prices:
New Evidence from Over-The-Counter Market. Journal of Banking & Finance,
34, 2822-2836.
Miao, H., Ramchander, S., & Wang, T. (2014). The Response of Bond Prices to
Insurer Rating Changes. The Geneva Papers, 39, 389-413.
Mokoaleli-Mokoteli, T., & Mongalo, B. (2017). The Impact of Corporate Credit
Ratings Change on Stock Returns of Firms Listed on JSE Exchange. Proceedings
of the European Conference on Management , Leadership & Governance, 311-322.
Moody’s Ratings Definintions. (2013). Retrieved April 6, 2013, from Moody’s Web
Ng, H. G., & McAleer, M. (2004). Recursive Modelling of Symmetric and
Asymmetric Volatility in the Presence of Extreme Observations. International
Journal of Forecasting, 20, 115-129.
Nordberg, D. (2011). Corporate Governance: Principles and Issues. London: Sage
Orlikowski, W. J., & Baroudi, J. J. (1991). Studying Information Technology in
Organizations: Research Approaches and Assumptions. Information Systems
Research, 2, 1-28.
Pinches, G. E., & Singleton, J. C. (1978). The Adjustment of Stock Prices to Bond
Rating Changes. Journal of Finance, 33, 29-44.
Poornima, B. G., Umesh, N. P., & Reddy, Y. V. (2015). The Impact of Changes in
Credit Ratings on Stock Returns. The IUP Journal of Financial Risk Management,
12, 52-67.
Reserve Bank of New Zealand - Credit ratings of banks in NZ. (2016). Retrieved April 6,
2013, from Reserve Bank of New Zealand Web site:
Reuters. (2008). Reuters Guide to Credit Ratings, Scales and Terms. Retrieved 2017,
from Reuters Web site:
Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium Under
Conditions of Risk. The Journal of Finance, 19, 425-442.
Standard & Poor’s Understanding Ratings. (2011). Retrieved April 6, 2013, from
Standard & Poor’s Web site:
Steiner, M., & Heinke, V. G. (2001). Event Study Concerning International Bond
Price Effects of Credit Rating Actions. International Journal of Finance and
Economics, 6, 139-157.
Urguiza, F. B., Navarro, M. C., & Trombetta, M. (2012). Disclosure Strategies and
Cost of Capital. Managerial and Decision Economics, 33, 501-509.
Weinstein, M. I. (1977). The Effect of A Rating Change Announcement on Bond
Price. Journal of Financial Economics, 5, 329-350.
Zhou, C. (2001). Credit Rating and Corporate Defaults. Journal of Fixed Income, 11,
How to Cite
Reddy, K., Bosman, R., & Mirza, N. (2019). IMPACT OF CREDIT RATINGS ON STOCK RETURNS. Buletin Ekonomi Moneter Dan Perbankan, 21(3), 343-366.