The informativeness of credit watch placement on bond rating revision

Abstract

This paper investigates stock price reaction to credit watch placement in bond rating revision process. We find that placing a credit watch causes significant abnormal returns in the company's stock. In other words, investors seem to concern more on the event of the company being put of a watchlist than the event of bond rating change itself. Moreover, the inclusion of credit watch placement considerably reduces stock price's volatility at the time of actual rating revision and mitigate the subsequent pricedrift after rating downgrade. We further show that credit watch placement has a greater impact on firm with a highdegree of information uncertainty measured by idiosyncratic volatility, firm's size, age and analyst dispersion. Overall, our findings accentuate the importance of credit watch placements in the overall fabric of credit ratings adjustments.