The Informational Content of Issuer Credit Rating Changes in Emerging Stock Markets: Evidence from China

Abstract

Abstract We study the information content of issuer credit rating changes announced by a group of six Chinese credit rating agencies. We conduct an event study, and we use multivariate regression analyses to identify factors driving abnormal stock returns. Our results confirm prior findings for Western countries that downgrades are associated with significant negative abnormal returns. However, upgrades and positive or negative rating outlooks do not seem to have information content. While we cannot find differences in information content conditional on which rating agency issues the downgrade, we find that abnormal returns may vary with the target firm’s industry. In addition, the magnitude of stock price reactions to rating downgrades seems to be related to the business cycle to some extent. With respect to the role of the industry in explaining the information content of rating changes, our results may be biased due to small sample size. Nevertheless, they illustrate that the role the industry plays in explaining investor behavior may deserve special attention in future research. Our findings imply that new rating information seems to be processed quickly in the Chinese stock market, and that market reactions to rating signals are largely in line with what has been observed for Western stock markets. Both observations lend credibility to observable stock prices. The chapter sheds new light on the relevance of Chinese credit rating agencies from an equity investor’s perspective and confirms similarities between the Chinese and Western stock markets with respect to the way rating signals are processed by investors.