The effect of Bond Rating Changes on stock prices: The European Case

Abstract: We have investigated the stock market’s reaction to bond issuers’ credit rating changes on a sample of large European firms during the time period January 2000 to March 2006. The study uses a market model to examine the abnormal returns surrounding the announcement, as well as the long term abnormal returns after a rating change. We have found abnormal returns of -1.31% surrounding the announcement for the companies whose credit ratings have been downgraded. No significant abnormal returns can be found for the companies that are upgraded. We are able to show that downgrades due to deteriorated financial prospect show significant negative abnormal returns of -1.99% surrounding the announcement, while abnormal returns for other downgraded firms are not statistically significant. Furthermore, our results suggest large, long term, positive, abnormal returns following a downgrade and long term, negative, abnormal results following an upgrade.