Title: The information value of credit rating withdrawals

Authors: Seongbaek Yi; Lisa Fairchild; Yoon S. Shin

Addresses: Department of Statistics, Pukyong National University, 45 Yongso-ro, Nam-gu, Busan, South Korea ' Department of Finance, Loyola University Maryland, 4501 N. Charles St., Baltimore, MD 21210, USA ' Department of Finance, Loyola University Maryland, 4501 N. Charles St., Baltimore, MD 21210, USA

Abstract: Moody's (2011) withdraws credit ratings when a debt issuer files for bankruptcy, does not provide sufficient information to the rating agency, or is merged with another firm. When ratings are withdrawn, there is less information available regarding an issuer's credit quality. We examine the stock and bond price reactions following announcements of Moody's credit rating withdrawals and find that the announcements of rating withdrawals result in significant and negative stock and bond price reactions for issuers with withdrawn ratings. Issuers that continue to have an S&P or Fitch's rating following a Moody's rating withdrawal experience a smaller stock price decrease than those without credit ratings from any rating agency. Moreover, we find that liquidity risk increases significantly around rating withdrawal announcements because we observe a sharp decrease in bond trading volume and frequency.

Keywords: ratings; rating agencies; information value; credit rating withdrawals; credit risk; liquidity risk; bond returns; stock returns; trading volume; stock price reactions; bond price reactions; bond trading volume; bond trading frequency.

DOI: 10.1504/IJBD.2016.077184

International Journal of Bonds and Derivatives, 2016 Vol.2 No.2, pp.108 - 132

Received: 06 Nov 2015
Accepted: 15 Nov 2015
Published online: 22 Jun 2016 *

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