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INTRA‐INDUSTRY EFFECTS OF BOND RATING ADJUSTMENTS

INTRA‐INDUSTRY EFFECTS OF BOND RATING ADJUSTMENTS Several studies find that bond rating downgrades cause negative valuation effects. Other studies find that signals conveyed by earnings releases, earnings forecasts, bankruptcies, and stock offerings of individual firms can be transmitted to their corresponding industries. By combining the two sets of studies, we hypothesize that bond rating changes may contain relevant information not only about the firm, but also about the corresponding industry. We find significantly negative valuation effects for rating downgrades, which are transmitted throughout the industry. Furthermore, we find that intra‐industry effects depend on particular characteristics of the bond downgrade, the downgraded firm, and industry rivals. Specifically, the negative intra‐industry effects are more pronounced when (1) the downgraded firm experiences a more severe share price response to the bond rating downgrade, (2) the downgraded firm is dominant in the industry, (3) the downgraded firm is more closely related to its rivals in the industry, and (4) the downgrade is due to a deterioration in the firm's financial prospects. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Financial Research Wiley

INTRA‐INDUSTRY EFFECTS OF BOND RATING ADJUSTMENTS

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References (18)

Publisher
Wiley
Copyright
© The Southern Finance Association and the Southwestern Finance Association
ISSN
0270-2592
eISSN
1475-6803
DOI
10.1111/j.1475-6803.1997.tb00265.x
Publisher site
See Article on Publisher Site

Abstract

Several studies find that bond rating downgrades cause negative valuation effects. Other studies find that signals conveyed by earnings releases, earnings forecasts, bankruptcies, and stock offerings of individual firms can be transmitted to their corresponding industries. By combining the two sets of studies, we hypothesize that bond rating changes may contain relevant information not only about the firm, but also about the corresponding industry. We find significantly negative valuation effects for rating downgrades, which are transmitted throughout the industry. Furthermore, we find that intra‐industry effects depend on particular characteristics of the bond downgrade, the downgraded firm, and industry rivals. Specifically, the negative intra‐industry effects are more pronounced when (1) the downgraded firm experiences a more severe share price response to the bond rating downgrade, (2) the downgraded firm is dominant in the industry, (3) the downgraded firm is more closely related to its rivals in the industry, and (4) the downgrade is due to a deterioration in the firm's financial prospects.

Journal

The Journal of Financial ResearchWiley

Published: Dec 1, 1997

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