Effect of Bond Rating on Share Prices

Abstract

Credit-rating agencies play a key role in financial markets by helping to reduce the informative asymmetry between lenders and borrowers regarding the creditworthiness of the latter. While the various bond-rating areas have been extensively evaluated for mature markets, similar evidence for emerging markets, such as India, is limited. In particular, the issues relating to know the efficiency of stock markets to assimilate bond-rating changes announcements made by rating agencies from time to time have been ignored. The present article constitutes an attempt in this direction to examine the effects of rating changes announcements on share prices in India. This article has examined the announcement effects of bond-rating changes on equity share prices in India during the six-year period, 1 April 2002 to 31 March 2008. Using a sample of ratings of 117 long-term debt instruments from 98 companies, the announcement effects have been examined by using event-study methodology. The empirical evidence indicates that the improved (deteriorated) financial and operating conditions of the companies were realized by the investment community before the ratings were changed by the bond-rating agency.

Keywords

Credit-rating Agencies Rating Changes Event Study India

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