CHARACTERISTICS AND INFORMATION VALUE OF CREDIT RATINGS

Abstract

Given the recent debate that credit rating agencies do not provide valuable information to the financial market, this study examines the market response towards other credit-related information released by Standard & Poor’s credit rating reports during rating changes. I find that both hard and soft information contained in the rating reports hold significant explaining power for the abnormal stock market returns. The soft information in the reports is measured by credit rating analysts’ tones and the informativeness of the reports. The hard information includes the specific reasons for the rating change such as financial and macroeconomics reasons. All these information are hand-collected. The significant link between the hard and soft information and the stock returns is mainly found in rating downgrades and for investment-grade firms. Moreover, when the hard and soft information are put together, the results show that the soft information is more importantly priced in the returns. Overall, this study reveals that credit rating reports contain valuable information in addition to the credit rating actions themselves.