Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Empirical Results-1)

Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Empirical Results-1)Aggregate Analysis
According to Table 1, in case of downgrades, the pre-event CAAR is positive and significant but post – event CAAR is not significant. The results indicate rating changes lag abnormal returns. The existence of lag may imply that the investors pre – empt or anticipate that the rating is about to be downgraded or there are leakages in information and therefore, the reaction exists before the announcement of downgrade. It indicates that the shareholders are able to anticipate the information through other variables related to corporate performance. The positive direction of abnormal returns shows that the wealth redistribution effect dominates and overcomes the negative earnings signal. While the abnormal returns are significantly positive pre-event, they are not significant after the rating downgrades.

The investors anticipate in advance that the rating is about to be downgraded and therefore, the wealth redistribution effect is exhausted in the pre-event window leading to insignificant returns in the post – announcement period. Another explanation could be that the downgrade is seen as an indication of deterioration in the financial health of the company which sends a negative signal to the shareholders. Thus, in the post announcement period the positive wealth redistribution effect is cancelled by the negative earnings signal resulting in insignificant returns for the shareholders. In case of upgrades, (Table 1), pre-event CAAR is not significant but post upgrade CAAR is found to be positive and significant. The statistical insignificance of pre – event results indicates the lack of anticipation by the shareholders in case of upgrades. It emphasizes that shareholders do not monitor good news or positive developments as closely as bad news or potentially negative developments. This confirms asymmetric investor reaction to different types of information.
In case of upgrades, significantly positive abnormal returns are observed after the rating change and there is no lag or anticipation of the rating change. The positive sign in case of upgrades indicates the dominance of signalling effect i.e. the rating change is seen as an indication of future trend of company’s performance.

Table 1. Aggregate Analysis: Pre-Event and Post-Event CAAR

Downgrades Upgrades
Pre – event Post – event Pre – event Post – event
CAAR 0.024* 0.009 -0.002 0.016*
SCAAR 3.358 1.393 -0.516 2.882

Tags: , , , ,