Information Dissemination and the Stock Price Reaction to Credit Rating Changes

Abstract

Credit rating agencies typically give 24 to 48 hours’ notice to issuers before they officially announce a credit rating change. On the day of the announcement, the rating change is announced through the rating agencies’ own website prior to its dissemination through newswires. Using intraday return data, we examine the dissemination of information about credit rating changes made by Standard and Poor’s. We show that over 60% of the three-day stock return around rating change announcements occurs in the preannouncement period. We find no evidence that this price movement is driven by the disclosure of corporate news during this period, suggesting that it is due to information leakage. We separately measure the price reaction to the credit rating change when it appears on S&P’s website and later when it is reported by newswires. We find a significant stock price reaction to the newswire reports, but not to the disclosure on S&P’s website, suggesting that some investors are not aware that S&P reports the change before it is picked up by wire services. Our findings lend support to the concerns raised by the SEC regarding the manner in which credit rating changes are announced.