Do Upgrades Matter? Evidence from Trading Volume
63 Pages Posted: 17 Jun 2015 Last revised: 19 Jun 2020
Date Written: July 18, 2017
Prior research documents no significant abnormal returns around upgrades of credit ratings, suggesting that upgrades do not convey new information. These tests are limited by lack of data, liquidity screens, and ambiguous predictions. We extend prior research using trading volume. Because volume is highly non-normally distributed (especially in the bond market), we derive a new, more powerful nonparametric test statistic that can be used in other applications. Our results show significant abnormal volume in both stock and bond markets around both upgrades and downgrades. Some of this volume is attributable to credit-ratings-based regulations and other factors. Controlling for other effects, we also find evidence that upgrade announcements contain information.
Keywords: Credit Ratings, Volume, Information, Nonparametric Tests
JEL Classification: C14, G12, G14, G24, G32
Suggested Citation: Suggested Citation