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The effect of bond rating changes and new ratings on UK stock returns

Record type: Article

This is the first study to use daily data from a major capital market outside of the US to examine the role of corporate bond and commercial paper rating changes on common stock returns. Using data published by Standard and Poors' credit rating agency between 1984 and 1992, we examine the impact of new credit ratings, credit rating changes and Credit Watch announcements on UK common stock returns. We find significant negative excess returns around the date of a downgrade and positive returns close to the date of a positive CreditWatch announcement. Hence, the financial markets would appear to place some importance on rating agency pronouncements in the UK. New ratings, whether short or long-term, have no significant impact on returns. We also attempt to quantify the impact of a new credit rating upon firm cost of capital through measures of conditional volatility and systematic risk. However, we find only weak evidence to suggest that a stock's cost of capital is reduced after a long-term credit rating is awarded for the first time.

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Citation

Barron, M.J., Clare, A.D. and Thomas, S.H. (1997) The effect of bond rating changes and new ratings on UK stock returns Journal of Business Finance and Accounting, 24, (3), pp. 497-509. (doi:10.1111/1468-5957.00117).

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Published date: 1997

Identifiers

Local EPrints ID: 37378
URI: http://eprints.soton.ac.uk/id/eprint/37378
ISSN: 0306-686X
PURE UUID: d17b64a7-250b-42e6-bcf0-289206189bed

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Date deposited: 23 Apr 2007
Last modified: 17 Jul 2017 15:42

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Contributors

Author: M.J. Barron
Author: A.D. Clare
Author: S.H. Thomas

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