Chapman University and the University of Oklahoma respectively. We thank workshop participants at Washington University, the University of Oklahoma, and Chapman University, the referee, and particularly the editor, David Mayers, for helpful comments.
Is a Bond Rating Downgrade Bad News, Good News, or No News for Stockholders?
Article first published online: 30 APR 2012
1993 The American Finance Association
The Journal of Finance
Volume 48, Issue 5, pages 2001–2008, December 1993
How to Cite
GOH, J. C. and EDERINGTON, L. H. (1993), Is a Bond Rating Downgrade Bad News, Good News, or No News for Stockholders?. The Journal of Finance, 48: 2001–2008. doi: 10.1111/j.1540-6261.1993.tb05139.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
We examine the reaction of common stock returns to bond rating changes. While recent studies find a significant negative stock response to downgrades, we argue that this reaction should not be expected for all downgrades because: (1) some rating changes are anticipated by market participants and (2) downgrades because of an anticipated move to transfer wealth from bondholders to stockholders should be good news for stockholders. We find that downgrades associated with deteriorating financial prospects convey new negative information to the capital market, but that downgrades due to changes in firms' leverage do not.