Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Summary and Conclusions-1)

Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Summary and Conclusions-1)This paper analyses the cross – sectional variation in the stock price reaction to bond rating changes in Indian context. The aggregate results show that downgrades are preceded by positive abnormal returns indicating that either there are leakages in information or the investors can do superior analysis. It may also indicate that rating changes by the rating agency lag the news which necessitates the rating change action and the shareholders are able to anticipate the ratings information through other variables related to corporate performance. No significant abnormal return was reported after downgrade.
In case of upgrades, no pre -event abnormal returns were observed. This implies that investors were able to anticipate downgrades but not upgrades, thus, investors seem to track bad news more than good news. On post upgrades basis, there were significantly positive abnormal returns. Signalling effect dominates the post – upgrade investor behaviour. This also indicates that rating upgrades have informational content.
The stock price reaction to bond rating changes varies for companies with different financial characteristics. The differential response is also seen on comparing upgrades with downgrades.
The firms with low P/B ratios and low profitability respond more strongly to the announcement of bond rating changes than their counterparts.
Results show that after the announcement of downgrade, all the companies with possible information problems namely – small in size, low p/b, less liquid, high leverage, high proportion of intangibles in total assets and low profitability displayed positive significant abnormal returns. This indicates that wealth redistribution effect is dominant in case of bond rating downgrade for firms which are expected to have less transparency, information problems and earnings management. The investors and traders can thus, earn positive payoffs after downgrades of such firms.

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