Do changes in bond ratings affect stock price returns?

Abstract

The study examines whether the asset pricing model holds true that expected return is related to risk. The paper examines whether a change in bond credit rating and therefore a change in risk, results in a change in stock price returns. The study uses data from the NASDAQ banking sector for the period January 1993 to December 2017. The sample consists of 25 banks and observations of 25 upgrades and 59 downgrades in bond ratings. The results show that an upgrade in bond credit rating does not result in a higher stock price return, while a downgrade results in a decrease in stock price return.