The informational content of sovereign credit rating: another look

This paper investigates the impact of unexpected news components relating to six different sovereign credit rating announcements on the risk and return of four major Eurozone financial markets. We apply macroeconomic announcement theory to construct the unexpected news component index. Our results suggest that the constructed index is highly significant than amalgamate announcements as well as separately announcements of sovereign ratings. Contrary to most existing studies of the sovereign rating literature that assumed that the effects of credit ratings on financial markets are asymmetric, we find symmetric effect of unexpected news components. We demonstrate that upgrades and downgrades considerably affect financial markets. The relevance of the impact is due to the introduction of "unexpected news components" information after a rating change announcement (information discovery effect). Furthermore, we find that the mean and volatility of most global markets increase in response to negative news component and fall for positive news component, suggesting that the market participants adjust their portfolios in response to the implied "news" content of these announcements relative to their expectations. It is noteworthy that markets only react to the news of review concerning large economies and tend to ignore those about small economies. Given the important role of rating agencies in global capital markets, these results should be of great interest to practitioners and researchers.