The Effect of Credit Rating Announcements

Abstract: The purpose of this study is to further deepen the knowledge surrounding credit rating announcements and their impact on companies’ stock prices. Furthermore, the authors want to investigate whether the potential impacts differ between the US market and the European market, as well as previous to the financial crisis compared to post the financial crisis of 2007- 2009. The methodology used is an event study and multivariate regression analysis. In order to formulate the hypotheses, the following theories have been used: Information content hypothesis, Efficient market hypothesis, Incentive signalling approach and the Economic rationality theory. To test the hypotheses, a sample consisting of 3691 credit rating changes between 2003-2019 for the European market and the US market has been examined. The study concludes that the US market reacts stronger to downgrades compared to the European market, while there is no difference for upgrades. The market also reacts stronger to downgrades after the financial crisis compared to before, with no correlation for upgrades before and after the crisis.