Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Summary and Conclusions-3)

Cross-Sectional Variation in Stock Price Reaction to Bond Rating Changes: Evidence from India (Summary and Conclusions-3)Again in case of portfolio with small proportion of intangibles a significantly positive relationship was observed between business cycle and post – event returns for upgrades. This indicates that in companies with low intangibility the value does not get eroded to a large extent in the downturn of business cycle.
The study shall be useful for regulators, rating agencies, investors, analysts, bankers and academicians.
The research has implications for the regulators like SEBI because the pre – emption of rating change may imply leakages of information and insider trading in case of companies undergoing rating change. The same can be examined by the regulators.
The study is useful for credit rating agencies. The role of credit rating agencies as information providers seems to be over-stated in the system. This is evident from the presence of pre -announcement stock price reaction in a number of cases indicating that the investors are able to gauge the financial position of the firm from indicators other than the rating change announcements. There seems to be a need for closer monitoring of assigned ratings.
The investors and traders can apply the results of the research to form profitable trading strategies.
The banks and other creditors may also find the study helpful in ascertaining how their returns and risk of default varies around rating change. The study is helpful particularly where, a bond rating downgrade is leading to positive returns. Assuming that the overall value of the firm remains constant it implies that the shareholders are gaining at the cost of bondholders owing to redistribution of wealth.
From academic point of view study contributes to the bond rating and market efficiency literature from the emerging market’s perspective.

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