DP8743 Sovereign Debt Rating Changes and the Stock Market

Author(s): Alexander Michaelides, Andreas Milidonis, George Nishiotis, Panayiotis Papakyriacou
Publication Date: January 2012
Date Revised: May 2014
Keyword(s): event studies, institutional quality., international finance, sovereign ratings, TRMI
JEL(s): G14, G15, G24
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8743

Using event studies we find statistically and economically significant, negative daily abnormal stock market returns prior to sovereign debt rating downgrade announcements. Instrumental variable techniques show that these findings are more pronounced in countries with lower institutional quality. Our analysis of the frequency and content of news shows that results cannot be explained away by unrelated, concurrent bad news. Instead, we find support for the explanation of leakage, which could take the form of leaked private information to a group of investors, but could also take the form of a rumor that eventually appears in the public domain.