The share price reaction to credit rating announcements on the Johannesburg Securities Exchange

Abstract

This report examines the JSE for any inefficiency that may exist with regard to the information content of credit rating announcements. Specifically, it tests the extent to which credit rating actions have an impact on share returns; the extent to which the credit rating agency influences abnormal returns; and finally the extent to which firm size impacts abnormal returns within the context of credit ratings announcements. An event study methodology was performed on 364 credit rating announcements of listed companies on the JSE between 1 January 2005 and 31 December 2013 in order to analyse the resulting share price cumulative average abnormal returns. These abnormal returns were then tested for significance at the 1 per cent significance level via a Monte Carlo bootstrap simulation. The results of this report show that the JSE is indeed inefficient when pricing in new information that result from credit rating announcements, and this is evident in three separate pieces of informational content. First, in the long-run credit rating downgrades (upgrades) have a significant negative (insignificant positive) impact on abnormal returns. Second, the ratings announcements of Moody s, Standard & Poor s and Global Credit Ratings Co. all exhibit significant (negative) abnormal returns, whilst those of Fitch are positive in the long-run. Finally, smaller firms are found to generate significant (negative) abnormal returns within the context of credit ratings announcements in the long run.