Are All Rivals Affected Equally by Bond Rating Downgrades?

Are All Rivals Affected Equally by Bond Rating Downgrades? We use revisions in analysts' earnings forecasts to examine how the bad news associated with a bond rating downgrade gets transferred from the downgraded company to its rivals. In general, we find that stock analysts revise their earnings expectations downward for rivals of companies with downgraded debt. However, the significance of the revision is limited to rivals of downgraded companies with non-investment grade debt only. For the rivals of companies with investment grade debt, we find no significant forecast revisions. We hypothesize that this differential impact is due to differing levels of market visibility. This is consistent with our finding that downgraded companies with non-investment grade debt are followed by significantly fewer stock analysts. Apparently not all rivals are affected equally by bond rating downgrades. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Are All Rivals Affected Equally by Bond Rating Downgrades?

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1022135605941
Publisher site
See Article on Publisher Site

Abstract

We use revisions in analysts' earnings forecasts to examine how the bad news associated with a bond rating downgrade gets transferred from the downgraded company to its rivals. In general, we find that stock analysts revise their earnings expectations downward for rivals of companies with downgraded debt. However, the significance of the revision is limited to rivals of downgraded companies with non-investment grade debt only. For the rivals of companies with investment grade debt, we find no significant forecast revisions. We hypothesize that this differential impact is due to differing levels of market visibility. This is consistent with our finding that downgraded companies with non-investment grade debt are followed by significantly fewer stock analysts. Apparently not all rivals are affected equally by bond rating downgrades.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 4, 2004

References

  • Intra-Industry Effects of Bond Rating Adjustments
    Akhigbe, A.; Madura, J.; Whyte, A. M.
  • Common Stock Offerings and Earnings Expectations: A Test of the Release of Unfavorable Information
    Brous, P. A.

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