Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Data)

The data about the bond rating changes was collected from the websites of the two main rating agencies in India namely – CRISIL and ICRA. A list of all the events where a company’s bonds had been upgraded or downgraded between November 2003 and February 2011 was made. This consisted of a total of 227 bond rating changes out of which 117 were downgrades and 110 were upgrades. However, these cases were checked for any contamination. The event was considered to be contaminated if any other major announcement like merger or acquisition, divestment, buyback of shares, debenture, GDR or FCCB conversion or exercising of ESOP or ESOS option took place 70 days before or 35 days after the announcement of rating change. Data was also considered contaminated if there was any capital structure change such as declaration of stock dividend, rights issues and stock splits within the event window or if there was an earnings announcement between ±3 days of the date of rating change. It was also important to identify companies for which regular stock price data was available for the event periods. After data filtering process we finally end up with 70 valid cases of which 31 were upgrades and 39 were downgrades. For all these 70 cases of rating revision, daily closing price data was obtained from BSE Sensex. Daily closing observations for BSE 200 stock index, which was used as market proxy, were also obtained for the corresponding periods. BSE 200 is a broad based value weighted (free float weighted) index which is compiled on the lines of Standard and Poor’s Index, USA.
The data for firm characteristics i.e., market capitalization, price to book value ratio, daily trading volume, debt equity ratio, net intangibles to total assets ratio and return to equity ratio was collected from Thomson Reuter’s Datastream software. The details about measurement of each characteristic as well as the number of cases in each characteristic sorted portfolio are given in Exhibit A. To classify the cases on the basis of firm characteristics, list of BSE 500 companies and the above mentioned attributes was also obtained for each year end from December 2002 to December 2010.

Exhibit A: Measurement of Firm Characteristics

FirmCharacteristic Measurement Calculation Number of usable cases Number of cases in each Portfolio
Size Natural Log ofMarketCapitalization Loge[(Price) X (Number of shares outstanding)] 51 cases (24 downgrades and 27 upgrades) Downgrades- 9 large and 15 small size. Upgrades- 19 large and 8 small size.
Price to Book Value Ratio Market Price to Book Value Ratio Market Price / Book Value per Share 50 cases (23 downgrades and 27 upgrades) Downgrades-, 4 high and 19 low P/B.Upgrades- 12 high and 15 low P/B.
Tradingvolume7 Natual log of Average trading volume to total average trading volume for all companies on BSE 500. Loge[(Average trading volume for one year preceding the date of rating change) ^ (total average trading volume for all companies on BSE 500)] 48 cases (23 downgrades and 25 upgrades) Downgrades-12 high and 11 with low trading volume.Upgrades- 12 high and 13 low trading volume.
Leverage Debt Equity Ratio Long-term debt / Shareholders’Equity. 42 cases (18 downgrades and 24 upgrades) Downgrades- 11 high and 7 low leverage. Upgrades- 11 high and 13 had low leverage.
Intangibles Net Intangibles to Total Assets Ratio Net Intangibles / Total assets 44 cases (18 downgrades and 26 upgrades) Downgrades- 10 high and 8 as low intangibles. Upgrades- 14 high and 12 had low intangibility.
Profitability Return on Equity PAT / Average Net Worth 44 cases (18 downgrades and 26 upgrades) Downgrades- 5 high and 13 with low profitability. Upgrades- 19 high and 7 had low profitability.

Tags: , , , ,