THE INFORMATION VALUE OF BOND’S CREDIT RATINGS, RATING REVIEWS AND RATING OUTLOOKS

Abstract

This study finds that all 3 indicators of credit quality disseminated by Moody’s hold valuable informational content. This conclusion is reached by examining the bond price effects during the various credit news announcements made by Moody’s. Based on a sample of approximately 8,000 credit rating events between July 2002 to December 2007, I also find that Watchlist assignments exhibit the most valuable source of credit information. Furthermore, across all events, bond price reactions are stronger for negative credit news compared to positive news. These results show that the credit rating agencies remain an important source of credit related information as the market responds to the rating actions and additional signals disseminated by the rating agencies. It also appears that Moody’s has been able to achieve its aim of providing additional signals to preempt investors of potential changes in credit quality of an issuer or a debt.