Abstract
Purpose – The objective of this study is to analyze the impact of changes in credit ratings on the long-term return of Brazilian firms. Design/methodology/approach – We conducted an event study to measure how stock prices in the Brazilian stock exchange (B3) react to rating upgrades and downgrades by Moody's and S&P. Findings – Our sample presents positive and significant returns measured by the BHAR for ratings downgrades and non-significant ones for upgrades. Our data also show the important role of the previous rating in explaining these results in a non-linear fashion. Originality/value – Our research makes an important contribution to the theory of market efficiency, analyzing the degree of information present in the announcements of credit ratings changes. We also present results for Brazilian companies, correcting gaps pointed out in previous methodologies.
Highlights
The informational content of corporate rating changes is a topic that has long been debated in the literature. Pinches and Singleton (1978) and Glascock, Davidson, and Henderson (1987) find no significant unanticipated effects on stock prices of companies having their risk ratings downgraded
Data were collected for all rating upgrades and downgrades by Moody’s and S&P of Brazilian companies traded on the B3, which make up the Bovespa Index, until the end of 2018
In previous studies, there has been a negative impact on stock returns for rating downgrades, but not for upgrades
Summary
The informational content of corporate rating changes is a topic that has long been debated in the literature. Pinches and Singleton (1978) and Glascock, Davidson, and Henderson (1987) find no significant unanticipated effects on stock prices of companies having their risk ratings downgraded. Papers published afterwards that study larger and more frequent (monthly and daily) databases find strong evidence that downgrades have an impact on short- and long-term stock returns (Griffin & Sanvicente (1982), Followill & Martell (1997), Dichev & Piotroski (2001), Norden & Weber (2004), and Linciano (2004)). Other authors, such as Holthausen and Leftwich (1986), Hand, Holthausen, and Leftwich (1992), and Dichev and Piotroski (2001), verify that rating upgrades do not have significant impacts. It is known as the “distress puzzle.” Some studies show a positive relationship between increased default risk and the rate of return on the stock, while others find the opposite result
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