The study examines whether a change in credit rating results in a change in daily excess stock returns because of the new information being released about the change in the firm’s perceived risk. The daily stock price data was collected for the US firms listed on the S&P500 for the period January 2006 to December 2015. Firms’ excess stock returns are compared with the market in a 14-day window around the downgrades and upgrades in credit ratings to measure the perceived change in risk when a rating change is announced. Further analysis is undertaken to test whether there are significant changes to security prices because of the change in credit rating for the period before-and-after the 2008 global credit crisis period. We also analyse the impact of individual credit rating agencies on the securities prices and as well as the impact of rating changes over different classes of ratings.
Our results are asymmetry, that is, there is a significant reaction to downgrades but not to upgrades of credit ratings over the full sample and for the years preceding the global credit crisis. In addition, our results provide a weak evidence of upgrades in credit ratings after the 2008 global credit crises has led to a significant change to security prices.