Title

Is a Bond Rating Downgrade Bad News, Good News, or No News for Stockholders?

Publication Type

Journal Article

Publication Date

12-1993

Abstract

We examine the reaction of common stock returns to bond rating changes. While recent studies find a significant negative stock response to downgrades, we argue that this reaction should not be expected for all downgrades because: (1) some rating changes are anticipated by market participants and (2) downgrades because of an anticipated move to transfer wealth from bondholders to stockholders should be good news for stockholders. We find that downgrades associated with deteriorating financial prospects convey new negative information to the capital market, but that downgrades due to changes in firms' leverage do not.

Discipline

Business

Research Areas

Finance

Publication

Journal of Finance

Volume

48

Issue

5

First Page

2001

Last Page

2008

ISSN

1540-6261

Identifier

10.1111/j.1540-6261.1993.tb05139.x