The Informational Value of Credit Rating Actions - The European Case of the Stock Market Reaction to Credit Rating Agencies' Announcements

Abstract: The paper applies the event study methodology to investigate the impact of credit rating events including outlook, watch, and rating change announcements (rating events) on share prices in Europe. In general, statistically significant, however, weak market reaction to negative rating events is found. The results before and after European rating agencies were first regulated at the end of 2009 are compared to examine if the stock market reacts differently to rating events, amid presumably increased quality of information contained in credit rating actions, in the post- regulation era. Nevertheless, there is no significant indication that the market reacts uniquely to rating events before or after the regulation. There is neither any compelling evidence that outlook, watch, and rating change announcements bear different information for investment and non- investment grade rating classes. Moreover, the paper concludes that rating migrations preceded by watch or outlook are neither more nor less informative than direct rating changes.