Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Introduction-5)

Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Introduction-5)Although some studies do cover the rating changes, but their impact on security prices is not examined. Only a few studies explore this relationship in the Indian context. Moreover, other important areas such as the effect of firm characteristics on the relationship between bond rating changes and stock return behaviour have not been studied. The impact of factors like anticipation, magnitude of rating change, transition to, from or within speculative grade and business cycle on stock returns after rating change in the Indian market is also largely unexamined. Thus, a serious gap exists in the existing literature on credit rating for the Indian environment. The present study attempts to fill this important research gap in bond market literature.
This paper explores the relationship between bond rating change information and stock return behaviour in India. It examines whether the rating changes have any informational content. It also evaluates the cross-sectional variation in the stock return behaviour to bond rating changes for firms with different characteristics (size, P/B ratio, liquidity, leverage, intangibles and profitability). The paper inter alia investigates the relationship between pre – event and post – event abnormal returns implying surprise or importance element in case of upgrades and downgrades and firm characteristic based portfolios. It also examines whether factors like magnitude of rating change, transition to, from or within speculative grade and business cycle influence post – event abnormal returns.
The paper is divided into 5 sections including the present one. Section 2 describes data and their sources, section 3 deals with methodological issues. The empirical results are discussed in section 4, while the last section provides summary and conclusions.

Tags: , , , ,