Document Type
Dissertation
First Faculty Advisor
Olinsky, Alan
Keywords
stock prices; ratings downgrade; event study
Publisher
Bryant University
Abstract
This paper examines the impact of a downgrade of a company’s credit rating on its stock price in the days surrounding the downgrade. If we consider this downgrade new information, then a negative impact on the company’s stock price would be expected. However, if we assume that rating agencies use information that investors have already accounted for, then there would be no impact. There could also be an impact, at least temporarily, due to the fact that a ratings downgrade is bad news, even if the reasons for the downgrade have already been priced in. To perform this analysis I used an event study, a technique commonly used in finance to identify the impact of one event on a particular variable. I discovered that no statistically significant abnormal returns exist on the day of a ratings downgrade, and on the days surrounding it. The information content of a downgrade to equity investors is low as the information resulting in the downgrade has already been reflected in the company’s stock price.
