The Effect of Bond Rating Agency Announcements on Bond and Stock Prices


  • JOHN R. M. HAND,



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    • Hand and Leftwich are from the Graduate School of Business at the University of Chicago. Holthausen is from the Wharton School at the University of Pennsylvania. We wish to thank John Elliott, Paul Healy, Gene Imhoff, Wayne Mikkelson, Dale Morse, Pat O'Brien, Scott Stickel, Tom Stober, an anonymous referee and David Mayers (editor) for their comments on a previous version of this paper, as well as workshop participants at Cornell University, Massachusetts Institute of Technology, the University of Michigan, Ohio State University, the University of Pennsylvania, and the University of Rochester. We wish to thank the Interactive Data Corporation for a research grant allowing access to the daily bond prices used in this study. Holthausen and Leftwich gratefully acknowledge the financial support of the Institute of Professional Accounting of the University of Chicago and the Center for Research in Security Prices.


This paper examines daily excess bond returns associated with announcements of additions to Standard and Poor's Credit Watch List, and to rating changes by Moody's and Standard and Poor's. Reliably nonzero average excess bond returns are observed for additions to Standard and Poor's Credit Watch List when an expectations model is used to classify additions as either expected or unexpected. Bond price effects are also observed for actual downgrade and upgrade announcements by rating agencies. Excluding announcements with concurrent disclosures weakens the results for downgrades, but not upgrades. The stock price effects of rating agency announcements are also examined and contrasted with the bond price effects.