Overflow effect of credit rating announcements on stock exchange based on event study

ABSTRACT

This study is aimed to identify the impact of credit rating announcements on the stock returns in stock markets and for this purpose, four different sectors of Pakistan stock exchange were selected and from each of these four sectors, different business organizations were selected, i.e. total 32 business organizations were selected. The credit rating announcement data were collected for these 32 business organizations belonging to four different sectors. Totally 101 credit rating announcements were selected and the time period for which the credit rating warnings were selected include last three years period, i.e. from 2014 to 2016. The collected data were analysed by calculating abnormal returns for each of the selected security and average abnormal returns, and cumulative average abnormal returns were calculated for four different sectors. Event study methodology was applied, and t-test and t-stats value were calculated and results were analysed on the basis of t-statistics. The results of analysis identified that credit rating announcements have a significant impact on stock prices and investors and other market participants are earning abnormal returns during two-day period after the announcements are made. In addition, these abnormal returns were either negative or positive, depending upon the nature of credit ratings announced. If the credit rating announced was upgraded, investors enjoyed positive abnormal returns while in case when credit rating announcements were downgraded, then investors bear negative abnormal returns. Finally, the findings of the study identified the applicability of random walk hypothesis on the Pakistan Stock Exchange and Pakistan Stock Exchange confirms the efficient market hypothesis with its semi-strong form of efficiency.

KEYWORDS:

• Credit rating announcements
• event study
• validity and reliability
• stock exchange

JEL CLASSIFICATION:

• G14
• E44
• C32

Acknowledgments

The article was financially supported by the National Social Science Fund of China “Research on the redistribution function of social security system: Research on the national social security fund’s intervention in pension insurance payment” (18BJY212) and “the Fundamental Research Funds for the Central Universities” in UIBE (CXTD9-04).

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the the Fundamental Research Funds for the Central Universities in UIBE [CXTD9-04].