Abstract
Our objective is to examine whether a rating change or Credit Watch announcement has a significant impact on Latin American stock prices. We conducted an event study to analyze stock market reaction to such news in the four major Latin American economies: Argentina, Brazil, Chile and Mexico. We find similar results to those previously observed in the literature, wherein the impact is quite significant for rating downgrades but less relevant for rating upgrades and Credit Watches. We also run cross section regressions to investigate which variables best explain the impact rating changes announcements have on stock prices in these countries. The results indicate that the most significant variable is the absolute change in the number of notches for downgrades. We conclude that credit ratings are relevant information in Latin America.
Highlights
Several investors and financial institutions rely on credit ratings because they summarize the creditworthiness of an issuer or issue in a single grade
Our sample consists of 319 rating changes or Credit Watch announcements, with 39 in Argentina, 138 in Brazil, 55 in Chile and 87 in Mexico
Our objective is to investigate stock market behavior in Argentina, Brazil, Chile and Mexico when a rating change or Credit Watch occurs and to identify variables that might help to explain the magnitude of investors’ reaction to the news
Summary
Several investors and financial institutions rely on credit ratings because they summarize the creditworthiness of an issuer or issue in a single grade. The main rating agencies are Moody’s, Fitch and Standard & Poor’s (S&P). The agencies issue a credit opinion based on analysis of financial and qualitative aspects of the issuer or issue. AAA to BBB- for S&P and Fitch and Aaa to Baa for Moody’s, ordered from best to worst credit quality, are considered investment grades and reflect a very low or almost nonexistent default probability. BB+ to CC for S&P and Fitch and Ba1 to Ca1 for Moody’s are considered speculative grades and reflect a higher default probability. There are grades for selective default (SD) and default (D)
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