Market Reaction to Credit Rating Announcements in the Irish Stock Market

Abstract

The topic of whether credit rating announcements are informational is becoming an internationally debated subject. There are, however, no conclusive findings up to now. Unlike previous studies that are largely based on large stock markets this research, by assessing the market abnormal returns, examines whether credit rating announcements convey more valuable information to investors in a relative small market, the Irish stock market, than to investors in a large market. This study finds evidence that is consistent with US, UK and Australian studies. These studies show that only bad news is associated with significant negative market abnormal returns. The findings suggest that only negative credit announcements providing a certification function are informational. Moreover, the cross-sectional multivariate test results suggest that a firm's leverage measured by the debt-to-asset ratio is essentially an important factor in relating a firm's abnormal returns due to credit rating announcement releases.