Event study concerning international bond price effects of credit rating actions

The influence of credit ratings on eurobond prices has been neglected for a long time. It is questionable whether non-US investors relate their investment decisions on US ratings and whether ratings from US agencies are relevant information sources for international capital markets. This paper examines daily excess eurobond returns associated with announcements of watchlistings and rating changes by Standard & Poor's and Moody's. Significant bond price reactions are observed for announcements of downgradings and negative watchlistings while upgradings and positive watchlistings do not cause announcement effects. Distinct from the results on national capital markets the international evidence shows that besides actual yield level and issuer type the issuer nationality is a key factor that determines the intensity of price reactions after downgrades. The price reaction is also significantly stronger for downgrades into speculative grade. This indicates, that the announcement effects can in part be explained by price pressure effects due to regulatory constraints rather than original information content of rating changes. Copyright (C) 2001 John Wiley & Sons, Ltd.