Do Announced Credit Rating Revisions Create Wealth Transfer Effects between Stockholders and Bondholders of European Firms?

Abstract

Wealth transfer effects between stockholders and bondholders on the announcement date of changes in a firm’s credit rating have primarily been examined a) for one type of security; b) on US capital markets; and c) by applying standard event study methods. In contrast to these investigations, we compare the price effects of stocks and corporate bonds of the same issuer using state-of-the-art event study methods. Our findings indicate that downgrades convey new information for stockholders and bondholders, whereas upgrades are only perceived positively by bondholders. Finally, we do not find evidence for the existence of wealth transfer effects on capital markets.