THE REACTION OF STOCK PRICES TO RATING CHANGES
English version N. 57 Studi e Ricerche (June 2004)
JEL Classification: G14, G18, G29
Keywords: Rating action, Market efficiency, Event study.
CONSOB, Divisione Mercati e Consulenza Economica
The paper investigates the reaction of common stock returns to rating changes for a sample of 299 rating actions involving Italian firms and announced by Fitch, Moody’s and Standard&Poor’s from January 1991 till August 2003. Rating changes and credit watches are classified according to direction, reason, the sector of the rated entities, anticipation through watches
and contamination by concurrent news. Significant average excess returns are recorded only for negative watches and for actual downgrades. Abnormal returns however seem to be driven mainly by the release of relevant information around the announcement of the rating action. The study, by providing evidence for a specific European country, is a useful sensitivity check to the earlier
empirical research, mainly focused on the U.S. case.
I wish to thank Francesco Cesarini, Andrea Resti and Giovanni Siciliano for helpful comments to a preliminary version of the paper. Any opinions expressed here are those of the author and not necessarily those of Consob.