Helpful comments were provided by Laurence Booth, Richard Cantor, Michael Goldstein (Financial Management Association discussant), Raymond Kan, Tom McCurdy, Jin Han Pae, Wulin Suo, Selim Topaloglu, and the reviewer, Louis Ederington. I thank Richard Cantor, John Hull, Christopher Mann, and Alan White for data used in various versions of this article. Excellent research assistance was provided by Yu Du and Ian Glew.
STOCK MARKET REACTION TO ANTICIPATED VERSUS SURPRISE RATING CHANGES
Article first published online: 22 JUN 2007
Journal of Financial Research
Volume 30, Issue 2, pages 301–320, Summer 2007
How to Cite
Purda, L. D. (2007), STOCK MARKET REACTION TO ANTICIPATED VERSUS SURPRISE RATING CHANGES. Journal of Financial Research, 30: 301–320. doi: 10.1111/j.1475-6803.2007.00215.x
- Issue published online: 22 JUN 2007
- Article first published online: 22 JUN 2007
I examine whether bond rating changes can be anticipated by investors and test whether the stock price reaction to the eventual change varies as a result. All else equal, the market reaction to changes that could have been easily predicted should be significantly smaller than the reaction to changes that are largely a surprise. Although rating upgrades prove difficult to predict, approximately 20% of downgrades can be correctly predicted using a relatively small number of publicly available variables. There is no significant difference between the stock price reaction to anticipated versus unanticipated rating changes.