Does US stock market react differently to rating announcements during crisis period? The case of the 2008 worldwide financial crisis

Abstract

Rating agencies are major players in financial markets and investor's decisions. However, following the worldwide 2008 crisis, the financial community has blamed rating agencies for not achieving one of their central functions: timely downgrading the distressed firms. There is also overwhelming evidence of investors distrust in rating announcements, particularly during instability episodes. Nevertheless, there is no prior work examining the performance of these activities during crisis. The global financial turmoil of 2008 offers a unique context to measure market reaction to rating announcements during crisis. We use a comparative event study, which parallels abnormal returns following rating announcements during crisis period to those during a stable benchmark period. There is evidence of stock prices over reaction to bad news. At the opposite, good and neutral news exhibit an insignificant impact. We also show that rating agencies tend to be more active, strongly cautious and more severe in rating firms.