The News Content of Bank Rating Changes: Evidence from a Global Event Study

Abstract

We study the information content of about 3,300 global bank rating changes before and after the Lehman shock in September 2008 from an equity investor's perspective. Based on a multi-model event study approach, we find that while upgrades are not associated with significant abnormal bank stock returns, downgrades have a significantly negative effect. In addition, abnormal returns are more negative post-Lehman, and even when controlling for bank size, this effect is considerably stronger for small banks than for large banks. We conclude that large banks' stock prices seem to be to some extent insulated from negative rating information even post-Lehman due to an implicit too big to fail subsidy anticipated by equity investors.