Information Transfer Effects of Bond Rating Downgrades

Purpose This study aims to examine the information transfer effects of customers’ credit rating downgrades on supplier firms. Design/methodology/approach In this study, the authors use suppliers’ cumulative abnormal returns around customers’ credit rating downgrade events to identify how shocks to customer credit impact supplier equity prices. The authors also incorporate ordinary least squares and weighted least squares regressions regression analysis of the determinants of supplier market response to customer downgrades. Findings The authors find that customer credit rating downgrades present significant negative shocks to the stock prices of supplier firms. Moreover, the authors show that the information transfer effects are determined by both firm- and industry-level factors, including the market anticipation of downgrades, the strength of the customer–supplier linkage, the industry rivals’ reactions to the downgrades and investor attention. The authors also find that the likelihood that a supplier will receive a rating downgrade is significantly higher following its primary customer firm’s downgrade. Originality/value To the best of the authors’ knowledge, this paper is the first to explore the information transfer effects of credit rating downgrades on primary stakeholders within the supply chain. The authors document that customer–supplier networks have valuable implications for the spillover effect across debt and equity holders. Information about customers’ financial stress is incorporated into suppliers’ equity prices outside of the context of customer bankruptcy.

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The information transfer effects of political connections on mitigating policy uncertainty: Evidence from China

Journal of Corporate Finance ◽

10.1016/j.jcorpfin.2021.101916 ◽

2021 ◽

Vol 67 ◽

pp. 101916

Author(s):

Guanchun Liu ◽

May Hu ◽

Chen Cheng

Keyword(s):

Information Transfer ◽

Political Connections ◽

Policy Uncertainty ◽

Transfer Effects

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Do corporate bond rating revisions convey information about earnings and dividend changes?

Corporate Ownership and Control ◽

10.22495/cocv9i3c3art4 ◽

2012 ◽

Vol 9 (3) ◽

pp. 373-393 ◽

Cited By ~ 1

Author(s):

Steven T. Anderson ◽

Gurmeet Singh Bhabra ◽

Harjeet S. Bhabra ◽

Asjeet S. Lamba

Keyword(s):

Stock Returns ◽

Cash Flows ◽

Corporate Bond ◽

Bond Rating ◽

Future Earnings ◽

Rating Agencies ◽

Abnormal Stock Returns ◽

Rating Changes ◽

Future Cash Flows ◽

Rating Downgrades

We study the information content of corporate bond rating changes regarding future earnings and dividends. Consistent with previous findings, rating downgrades are associated with negative abnormal stock returns, while rating upgrades appear to be nonevents. For downgrades, earnings decline in the two years prior to and the year of the rating change announcement but increase in the year after the rating review. We also find that rating downgrades are followed by a subsequent downward adjustment in dividends. While rating upgrades follow a period of rising earnings, they do not signal any increase in future earnings and no subsequent dividend adjustments are observed. Overall, our results indicate that rating agencies respond more to permanent changes in cash flows and provide little information, if any, about future cash flows.

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Why do stock prices react to bond rating downgrades?

Managerial Finance ◽

10.1108/03074350310768599 ◽

2003 ◽

Vol 29 (11) ◽

pp. 93-107 ◽

Cited By ~ 1

Author(s):

Yongtae Kim ◽

Sandeep Nabar

Keyword(s):

Stock Prices ◽

Bond Rating ◽

Rating Downgrades

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Equity short selling and bond rating downgrades

Journal of Financial Intermediation ◽

10.1016/j.jfi.2014.02.005 ◽

2015 ◽

Vol 24 (1) ◽

pp. 89-111 ◽

Cited By ~ 29

Author(s):

Tyler R. Henry ◽

Darren J. Kisgen ◽

Juan (Julie) Wu

Keyword(s):

Short Selling ◽

Bond Rating ◽

Rating Downgrades

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Revisiting Post-Downgrade Stock Underperformance

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x15598448 ◽

2016 ◽

Vol 32 (2) ◽

pp. 271-299 ◽

Cited By ~ 1

Author(s):

Alfred Zhu Liu ◽

Le Sun

Keyword(s):

Stock Returns ◽

Default Risk ◽

Recovery Effect ◽

Bond Rating ◽

Early Signal ◽

Long Run ◽

The Difference ◽

New Evidence ◽

Rating Downgrades

Prior research documents significant negative long-term stock returns following bond-rating downgrades. Some downgraded firms are placed on credit watches before downgrades, and we find that the post-downgrade stock underperformance of such firms is significantly reduced. We explore two explanations for the difference in post-downgrade stock performance that are not mutually exclusive: (a) a credit watch placement provides an early signal of the subsequent rating downgrade and gives investors more time to better understand the information content of the downgrade (the early-disclosure effect), and (b) a credit watch placement induces better recovery from credit deterioration for the downgraded firm in the long run (the recovery effect). We find that firms receiving watch-preceded downgrades show better improvements in operating profitability, financial leverage, and overall default risk, and are less likely to be further downgraded in future periods, compared with firms that are directly downgraded. Our findings suggest that the recovery effect is important in explaining downgraded firms’ performance in the long run and provide new evidence in support of the premise in the recent literature that credit watches can induce on-watch firms’ efforts to restore deteriorated credit quality.

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