The Information Value of Bond Ratings


  • Doron Kliger,

  • Oded Sarig

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    • Kliger is from Haifa University. Sarig is from Tel Aviv University and the Wharton School. Part of this research was conducted while Kliger was at the Wharton School. We would like to thank two anonymous referees, Yakov Amihud, Simon Benninga, Eli Berkovitch, Richard Cantor, John Core, Darrell Duffie, Eugene Kandel, Shmuel Kandel, Ron Kaniel, Moshe Kim, Michael Landsberger, Benny Levikson, Isaac Meilijson, Dave Robinson, Ken Singleton, Catherine Schrand, René Stulz, the editor, Menahem Spiegel, Franco Wong, and seminar participants at the Hebrew University, NYU, Tel Aviv University, University of Haifa, University of Michigan, and the Wharton School for helpful comments and suggestions. Kliger thanks the Fulbright Foundation and the Israel Foundation Trustees for partial financial support.


We test whether bond ratings contain pricing-relevant information by examining security price reactions to Moody's refinement of its rating system, which was not accompanied by any fundamental change in issuers' risks, was not preceded by any announcement, and was carried simultaneously for all bonds. We find that rating information does not affect firm value, but that debt value increases (decreases) and equity value falls (rises) when Moody's announces better- (worse-) than-expected ratings. We also find that when Moody's announces better- (worse-) than-expected ratings, the volatilities implied by prices of options on the fine-rated issuers' shares decline (rise).