THE ADJUSTMENT OF STOCK PRICES TO BOND RATING CHANGES

THE ADJUSTMENT OF STOCK PRICES TO BOND RATING CHANGES BOND RATINGS ARE THE principal source of investor information about the "quality" and marketability of various bond issues. As such, they have been subjected to considerable investigation in recent years [13, 26, 27, 32, 33]. While these studies have contributed to our knowledge about the apparent determinants of bond ratings, the informational content of bond rating changes has only begun to be examined in detail. Capital market efficiency requires that prices "fully reflect" all available information. Studies [4, 6, 7, 14] have indicated that the capital market for common stocks is highly efficient in that there is no significant price adjustment when new publicly available information is considered. Capital market efficiency also implies that the markets for different securities of the same firm are not segmented; thus, information about the future prospects of the firm should flow freely between the bond market and the stock market. Taking advantage of these properties of capital market efficiency, this study examines the information content of bond rating changes (which signify the rating agencies' assessment of substantial improvement or deterioration in the financial and operating condition of a firm) as evidenced in common stock return residuals. Previous research on the information content http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

THE ADJUSTMENT OF STOCK PRICES TO BOND RATING CHANGES

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Publisher
Wiley
Copyright
1978 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1978.tb03387.x
Publisher site
See Article on Publisher Site

Abstract

BOND RATINGS ARE THE principal source of investor information about the "quality" and marketability of various bond issues. As such, they have been subjected to considerable investigation in recent years [13, 26, 27, 32, 33]. While these studies have contributed to our knowledge about the apparent determinants of bond ratings, the informational content of bond rating changes has only begun to be examined in detail. Capital market efficiency requires that prices "fully reflect" all available information. Studies [4, 6, 7, 14] have indicated that the capital market for common stocks is highly efficient in that there is no significant price adjustment when new publicly available information is considered. Capital market efficiency also implies that the markets for different securities of the same firm are not segmented; thus, information about the future prospects of the firm should flow freely between the bond market and the stock market. Taking advantage of these properties of capital market efficiency, this study examines the information content of bond rating changes (which signify the rating agencies' assessment of substantial improvement or deterioration in the financial and operating condition of a firm) as evidenced in common stock return residuals. Previous research on the information content

Journal

The Journal of FinanceWiley

Published: Mar 1, 1978

References

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