Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Summary and Conclusions-2)

For firms which may have information problems, response differed after upgrades. While most of these portfolios showed signalling effect (low P/B, less liquid stocks, high intangibles and low profitability) and exhibited positive returns in the post – event period, wealth redistribution effect was found to be strong in case of high leverage companies as shown by negative post – event returns. Small sized companies had insignificant returns in the post upgrade period.
For companies which are expected to have transparency and better disclosures, the post rating change results are not as strong as their counterparts. There is mixed response to downgrade announcements. In case of downgrades, the wealth redistribution effect dominates in case of only large size, highly liquid and low intangibles companies. Again in case of such firms, the results after upgrade announcement support the signalling effect in only three cases (large size, high P/B, and low leverage).
Analysing the factors that influence post -rating performance, it is observed that pre – event CAR negatively affects the post – event CAR. The negative sign implies that where the downgrade is anticipated by the investors, the post – event abnormal returns are low, whereas, the post – event abnormal returns are larger in cases where the downgrade is a surprise. The results also confirm that there is a significantly negative relationship between post – event abnormal returns and magnitude of rating change in case of downgrades which is contrary to prior research. A possible explanation could be that investors generally track troubled companies which may experience a higher magnitude of downgrade. Thus, reducing the surprise element which is reflected in lower post – event abnormal returns.
Firm characteristics based portfolios were found to differ cross – sectionally in respect to their response in only two cases. The relationship between pre – event and post – event returns was found to be significantly positive in case of upgrades for portfolios with large trading volume indicating importance of the information being conveyed.

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