The impact of changes in credit ratings on stock returns

Abstract

This study broadly investigates the impact of changes in credit ratings of companies on the share prices of the mid-cap and small cap Indian companies, using event study methodology for a window period of 40 days. Specifically, the study investigates whether the investors respond strongly to the changes in the ratings of the companies and tests whether there is any significant difference in the value of the share prices before and after the announcement dates of credit ratings. The study considers a sample of 12 mid-cap and 12 small cap companies listed in the Bombay Stock Exchange for the period 2010-2014 to investigate the aforesaid issue. The study concludes that there is a significant impact of rating upgrades and downgrades on the stock returns of the investors. The impacts of such announcements are more pronounced near the announcement date and far off dates as well. Thus, the study observes that the rating announcements have an immediate and long-term significant impact on firms' share prices. The impacts of downgrade announcements on companies' share prices are observed to be more prominent than the upgrade announcements.