Do cultures influence abnormal market reactions before official sovereign debt rating downgrade announcements?

Abstract

We investigate whether cultural norms influence the way market information is incorporated into overall market prices. We examine whether cultures influence abnormal market reactions before official sovereign debt rating downgrade announcements across 46 countries. Michaelides et al. (2015) find that institutional quality is significantly associated with less negative abnormal market reactions prior to downgrades. Hofstede’s six cultural dimensions (Hofstede and Bond, 1988) are used to measure cultural differences. We show that high masculinity and high individualism are significantly associated with less negative abnormal market reactions. Masculinity remains significant when the model includes institutional quality and other key variables.