Abstract
This study examines the informational role of credit watch placement in the overall bond rating process. We find that the act of a company’s bond being put on a credit watch placement is, in itself, associated with significant abnormal returns in the company’s stock. In addition, we show that bond rating revisions that are associated with their initial inclusion on credit watch placement are more informative than rating changes that occur without initial inclusion on a credit watchlist. More importantly, the inclusion of credit watch placement significantly reduces the company’s stock price volatility at actual rating revision as well as the subsequent price drift after rating downgrade. Finally, we find that credit watch placement has a greater impact on firms with a high degree of information uncertainty. Overall, our findings underscore the importance of credit watch placements in the overall fabric of credit ratings adjustments.
|