JUNE 1983 The Information Content of Municipal Bond Rating Changes: A Note ROBERT W. INGRAM, LEROY D. BROOKS, and RONALD M. COPELAND* MUNICIPAL BOND RATING CHANGES have positive social value if they signal previously unavailable information on changes in municipal financial soundness. Weinstein [ll]has found that rating changes for corporate bonds do not appear to contain relevant new information. His finding is consistent with that of Pinches and Singleton , that stock price adjustments occurred several months prior to a corporate bond rating change. Rating agencies apparently respond to changes in corporate financial and operating conditions several months after the information is impounded in bond and stock prices.' However, as a result of institutional differences between corporate and municipal bond markets, it is possible that rating changes for municipal bonds do convey new information. This note examines the information content of municipal bond rating changes by evaluating municipal bond price adjustments during the period surrounding a rating change. The joint hypothesis tested is that municipal bond rating changes convey information to investors which is relevant for assessing equilibrium values of the securities, and that the municipal bond market is efficient so that valuation changes occur simultaneously with rating
The Journal of Finance – Wiley
Published: Jun 1, 1983
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