Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/219841 
Year of Publication: 
2017
Series/Report no.: 
Institute of Economic Research Working Papers No. 18/2017
Publisher: 
Institute of Economic Research (IER), Toruń
Abstract: 
Firms with low credit risk realize higher returns than firms with high credit risk. This credit risk effect in the cross-section of stock returns is a puzzle because investors appear to pay a premium for bearing credit risk. A higher credit risk can reduce a propensity to invest. The basic goal of the paper is to analyse and verify the impact of the changes of financial and nonfinancial institutions' credit ratings on the rates of return of shares. The following hypotheses have been formed: first, differences in the strength and direction of the reaction of stock prices between financial and nonfinancial institutions have been observed. Secondly, downgrades of credit ratings have got a stronger impact on the rates of return of shares than upgrades thereof. The analysis has been constructed for European companies for the period between 1995 and 2016 using the event study method. The sample has been divided according to: the direction of changes in credit ratings, countries' economic divisions, the character of the institution. The prepared analysis suggests that nonfinancial stock prices react to changes in credit ratings similarly to stock prices of financial institutions. The moment of reaction is differentiated by taking the level of economic development. Generally, a stronger reaction to credit rating changes in the case of companies from lower and middle economies has been observed the than from high-income countries.
Subjects: 
financial institutions
nonfinancial institutions
event study
credit ratings
stock prices
JEL: 
G24
F21
G14
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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