Abstract
Global institutional investors face constraints, in the form of either external regulations or internal firm policies, with regard to investing in countries rated speculative grade. As a consequence, when a country receives (loses) its investment-grade status, a significant inflow (outflow) of foreign investment is likely to occur and, thus, a global portfolio should increase (diminish) in importance as a source of systematic risk for stocks traded in that country. We study how stock prices behave around such events. Our results are consistent with theory.
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