Market reactions to the credit risk announcements
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Using the extensive datasets, we analyze the effect of credit rating announcements on the bond and stock liquidities. We show that the average transaction costs increases (decreases) after downgrade (upgrade) credit rating news events. We interpret these results as evidence that liquidities improve or deteriorate following upgrade or downgrade announcement. We also find more pronounced phenomenon among the lower credit rated securities. That is, securities with poorer credit quality respond more strongly to the news announcements. Lastly, we report that the watchlists announcement convey more information contents than real rating changes.