THE INCREMENTAL INFORMATION-CONTENT OF BOND RATING REVISIONS - THE AUSTRALIAN EVIDENCE

The objective of this study is to provide evidence on the information content of bond revisions by controlling for the information content of concurrent annual accounting income numbers and testing the incremental information content of bond rating revision. The reasons for this approach is threefold. First, the information content of annual accounting income numbers is well documented in the literature. Second, bond rating agencies in their revisions extensively utilise accounting information, hence it could be argued that bond rating revisions only confirm what is already known by equity investors. Third, recent evidence indicates an 'earnings drift' effect surrounding earnings announcements which could drive abnormal returns associated with bond revisions. However, by controlling for the information content of annual accounting income numbers, evidence can be provided on the value added by rating agencies. The results of the study indicate that only the announcement of bond downgrades has incremental information content.