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      What moves stock prices around credit rating changes?

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          Abstract

          Using monthly and multi-day return windows, research shows that credit rating downgrades often reveal new information and lead to significant stock price reactions but that upgrades do not. Using intraday data, we revisit these findings and extend them by examining the possibility of informed trading ahead of the announcement of credit rating changes. Credit rating agencies delay public announcements of rating changes to provide issuers with time to review and respond to rating reports, which opens the door for informed trading in advance of credit rating changes. Using data on rating changes from S&P, Moody’s, and Fitch, we find a more modest price reaction to rating downgrades than documented elsewhere and show that stock prices respond to changes in long-term issuer ratings but not to changes in ratings of a single instrument or a subset of instruments. Most interestingly, we find that prices start moving before a downgrade announcement, controlling for other news and investor anticipation. These pre-announcement movements are concentrated among observations where credit analysts are motivated to disclose private information to advance their careers. The beneficiaries of these disclosures appear to be institutional investors.

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          Most cited references36

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          Inferring Trade Direction from Intraday Data

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            Short-Selling Prior to Earnings Announcements

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              The relationship between credit default swap spreads, bond yields, and credit rating announcements

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                Author and article information

                Contributors
                naim.ozel@utdallas.edu
                Journal
                Rev Account Stud
                Review of Accounting Studies
                Springer US (New York )
                1380-6653
                1573-7136
                7 January 2021
                : 1-38
                Affiliations
                [1 ]GRID grid.47840.3f, ISNI 0000 0001 2181 7878, Haas School of Business, , University of California, Berkeley, ; Berkeley, CA USA
                [2 ]GRID grid.267323.1, ISNI 0000 0001 2151 7939, N. Jindal School of Management, , University of Texas at Dallas, ; Richardson, TX USA
                [3 ]GRID grid.25879.31, ISNI 0000 0004 1936 8972, The Wharton School, , University of Pennsylvania (Visiting), ; 3620 Locust Walk, Suite 1314, Philadelphia, PA 19104 USA
                Article
                9573
                10.1007/s11142-020-09573-6
                7788283
                2c7a47a4-4725-4be8-b6d4-afc8efba6bfb
                © The Author(s), under exclusive licence to Springer Science+Business Media, LLC part of Springer Nature 2021

                This article is made available via the PMC Open Access Subset for unrestricted research re-use and secondary analysis in any form or by any means with acknowledgement of the original source. These permissions are granted for the duration of the World Health Organization (WHO) declaration of COVID-19 as a global pandemic.

                History
                : 9 December 2020
                Categories
                Article

                credit ratings,intraday timing,corporate news,investor anticipation,informed trading,institutional trading,d82,g12,g14,g24

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