The role of Credit Rating Agencies (CRAs) in financial markets AND, Event Studies and Abnormal Returns

Abstract

This paper focused on the main impact of the credit rating changes on stock prices and bonds prices. It found that changes in credit rating have asymmetric effects on stocks price reactions. Most studies documented that downgrade cases have a significant impact on stocks while upgrade cases do not. In bond markets, the downgrades in credit rating as well have a significant effect on bonds prices while upgrades do not, except in few cases such that rating upgrades from speculative-grade to investment-grade. Additionally, few studies have reported that the sensitivity of the stocks price to rating downgrades could be less in cases that companies have traded CDSs. This study has focused on price reactions and is better for future research to focus on other impacts such on liquidity or that relative to investors behaviours such as trading volumes and patterns.