Do Upgrades Matter? Evidence from Trading Volume

Prior research examines the information content of credit rating changes using returns in stock, bond or credit default swap markets. Results are mixed, generally showing a significant reaction to downgrades with much weaker results for upgrades. We extend prior research using abnormal trading volume. Because trading volume is highly non-normally distributed (especially in the bond market), we derive a new nonparametric test statistic that can be used to test abnormal volume in other applications. Our results show significant abnormal volume in both stock and bond markets around upgrades and downgrades, consistent with the hypothesis that credit rating changes are informative.