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The Risk-Return binomial after rating changes



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Abad Romero, Pilar and Robles Fernández, María Dolores (2014) The Risk-Return binomial after rating changes. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 23, 2014, ISSN: 2341-2356 ] (Unpublished)

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Official URL: http://eprints.ucm.es/2634/


Risk-averse investors take into consideration risk-return tradeoff for decide their new position after the release of relevant information. This paper analyzes the informational content of rating change announcements focusing on the joint reaction they cause on the risk-return binomial. Our purpose is to identify the main factors that signal which announcements are informative. To do that we estimate a binomial logit model for the probability of informative content of credit rating announcements. We analyze a sample of rating events affecting Spanish listed firms from 2000 to 2010. Empirical results show significant differences in the informative content between positive and negative rating events. For both kinds of announcements, we find higher informative content when agencies agree about the new level of solvency, whereas those affecting high covered firm that operate in highly regulated sectors are the less informative. Other factors as the presence of a previous rating refinements or trends in the credit quality reveals different information depending on the direction of the rating event. Finally, we find the announcements after de crisis disclose less information, suggesting a loss of reputation of CRAs.

Item Type:Working Paper or Technical Report
Additional Information:

The information provided by Fitch and Moody’s is appreciated. Any errors are solely the responsibility
of the authors. This work has been funded by the Spanish Ministerio de Ciencia y Tecnología (ECO2012-31941 and ECO2011-23959), and Junta de Comunidades de Castilla-La Mancha (PEII11-0031).

Uncontrolled Keywords:Abnormal return, Abnormal systematic risk, Abnormal volatility, Logit model.
Subjects:Social sciences > Economics > Econometrics
JEL:G12, G14, G24, C22
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
ID Code:26434
Deposited On:28 Jul 2014 12:05
Last Modified:28 Jul 2014 12:05

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