Working Paper: CEPR ID: DP8743
Authors: Alexander Michaelides; Andreas Milidonis; George Nishiotis; Panayiotis Papakyriacou
Abstract: Using event studies we find statistically and economically significant, negative daily abnormal stock market returns prior to sovereign debt rating downgrade announcements. Instrumental variable techniques show that these findings are more pronounced in countries with lower institutional quality. Our analysis of the frequency and content of news shows that results cannot be explained away by unrelated, concurrent bad news. Instead, we find support for the explanation of leakage, which could take the form of leaked private information to a group of investors, but could also take the form of a rumor that eventually appears in the public domain.
Keywords: event studies; institutional quality; international finance; sovereign ratings; TRMI
JEL Codes: G14; G15; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign debt rating downgrades (F34) | Leakage of information regarding downgrades (L15) |
| Observed stock market drop (G17) | Attributed to unobserved leakage or observed leakage (C29) |
| Sovereign debt rating downgrades (F34) | Negative abnormal stock market returns (G17) |
| Lower institutional quality (O17) | Larger negative market reactions (G19) |
| One-standard deviation decrease in TI index (C43) | Significant decline in CAAR (C22) |
| Market reactions to downgrades (G19) | Greater than market reactions to upgrades (G19) |