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Credit Ratings and Stock Liquidity

Credit Ratings and Stock Liquidity We analyze contemporaneous and predictive relations between credit ratings and measures of equity market liquidity and find that common measures of adverse selection, which reflect a portion of the uncertainty about future firm value, are larger when credit ratings are poorer. We also show that future rating changes can be predicted using current levels of adverse selection. Collectively, our results validate widely used microstructure measures of adverse selection and offer new insights into the value of credit ratings and the specific nature of the information they contain. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

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Publisher
Oxford University Press
Copyright
© The Author 2005. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/hhj004
Publisher site
See Article on Publisher Site

Abstract

We analyze contemporaneous and predictive relations between credit ratings and measures of equity market liquidity and find that common measures of adverse selection, which reflect a portion of the uncertainty about future firm value, are larger when credit ratings are poorer. We also show that future rating changes can be predicted using current levels of adverse selection. Collectively, our results validate widely used microstructure measures of adverse selection and offer new insights into the value of credit ratings and the specific nature of the information they contain.

Journal

The Review of Financial StudiesOxford University Press

Published: Oct 28, 2006

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