Abstract:
I examine price reaction to credit ratings announcements by Moody’s and Standard & Poor’s for a sample of Chinese listed companies from May 2003 to May 2013. The results indicate that negative rating announcements induce significant negative abnormal returns for non-finance companies on the Hong Kong stock market and the Frankfurt stock market, supporting the hypothesis that negative credit rating announcements provide a negative information signal. Consistent with prior literature, this study does not find significant positive price reactions associated with positive rating announcements. This may reflect prior information leakage of good news into the market by firms that then subsequently have a positive rating change. In addition, the study also finds that initial rating announcement effects are larger for larger firms, firms with higher leverage or non-finance companies. For negative rating changes, firms receiving negative CreditWatch placements or firms that experience larger negative pre-announcement window CARs are associated with more statistically significant negative announcement window CARs. The price reactions of positive rating changes are statistically significantly larger for firms that experience greater positive pre-announcement window CARs and firms receiving positive CreditWatch Placement.