Table 4 contains the average abnormal returns and their respective p-values for the period of ten days prior and after the event as well as the event date itself (-10, +10). The values in the table were derived from the sample data from both periods of 2003-2007 and 2011-2015. Possible discrepancies between average abnormal returns and cumulative average abnormal returns are due to rounding errors. Although CAAR are calculated by adding AAR from consecutive days together, CAAR values in the tables are calculated using exact AAR values instead of the rounded ones in the table.
After that the cumulative average abnormal returns are displayed in a similar fashion for the following periods: 0,+1; 0,+5; 0,+10 and -10,+10. The purpose of this section is to present the average cumulative effects during and after the event in order to clarify which portion, if any, of the cumulative average abnormal returns should be attributed to the event itself.
Furthermore, the first three intervals are meant to determine whether there is possible lag.
For instance, if the 0,+1 period does not show any statistically significant effects and the 0,+10 does lag may be inferred. The reference interval -10,+10 with the whole event window was included for comparison.
Table 4. Results for interval 2003-2015.
* statistically significant at least at 90% confidence level, ** statistically significant at least at 95% confidence level
The results for issuer rating upgrade announcements show at least one slight trend. The interval from t-6 to t0 demonstrates a negative trend in the average abnormal returns.
However, only t-6, t-5 and t-4 of these days within the interval demonstrate abnormal returns that are statistically insignificant at the commonly employed confidence levels. This would suggest that issuer rating upgrade announcements do not cause abnormal returns after the event, although t+8 and t+10 also have abnormal returns that are statistically significant at least at 90% confidence level. The lag is too great for these effects to be attributed to issuer rating upgrade announcements.
The statistically significant abnormal returns may be caused by the market adjustment. This notion is supported by the fact that effects on t+8 and t+10 are opposite yet almost identical in terms of their absolute values. The results suggest that the event is anticipated by the market or there are other factors that cause the statistically significant abnormal returns.
Furthermore, the negative development of the cumulative average abnormal returns is counterintuitive as one would rather expect the returns to be positive after an upgrade in the rating, unless the upgrades are interpreted by stockholders as wealth transfer from them to bondholders in the form of decreased leverage, for instance, as Goh et al. (1993) argue
could be the case. This could also mean that on average the markets have anticipated the positive signals in advance from other sources and the negative trend demonstrated in the table is merely normal adjustment following an overreaction in stock prices.
Average abnormal returns for issuer rating downgrade announcements show less consistent trends that are four days or shorter, for instance, t-8to t-5 and t0 to t+2. Only the average abnormal returns on days t-7, t-6, t+2 and t+6 are statistically significant at least at the 90% confidence level. Given that the observed changes within those two days are in the opposite directions, it would not be safe to assume that issuer rating downgrades are the primary cause for the statistically significant changes. A further case for rejecting the notion that the abnormal returns are caused by issuer rating changes is that similar to the upgrades, the development of the cumulative average abnormal returns is mostly inconsistent with intuitive expectations for credit rating downgrades within the event window as it is mostly positive. However, as with upgrades an argument can be made that on average the markets considered the downgrades as a sign of wealth transfer from bondholders to stockholders.
Table 5 includes cumulative abnormal returns for selected intervals for both issuer rating downgrades and issuer rating upgrades. As briefly mentioned earlier the purpose of this is to demonstrate the effect of the event more aptly, since all but the reference interval (-10, +10) are selected from the event day onwards.
Table 5. Cumulative average abnormal returns for interval 2003-2015.
2003-2015 Upgrades
Period 0,+1 0,+5 0,+10 -10,+10
CAAR -0,08 % 0,45 % 0,05 % -2,17 %
P-value 0,84 0,52 0,96 0,11
2003-2015 Downgrades
Period 0,+1 0,+5 0,+10 -10,+10
CAAR 0,69 % 1,35 % 0,66 % 1,84 %
P-value 0,22 0,17 0,62 0,31
* statistically significant at least at 90% confidence level, ** statistically significant at least at 95% confidence level
For issuer rating upgrade announcements, the immediate change (0,+1) after the event date appears to be very minimal. The next interval (0,+5) seems to capture most of the change if the reference interval (-10,+10) is excluded. The cumulative average abnormal returns from the event date until the end of the event window (0,+10) are near zero again.
None of the cumulative average abnormal returns within the selected intervals are statistically significant at the commonly used confidence levels, however, the cumulative
average effects during the reference interval are statistically significant at an 85%
confidence level. This further corroborates the notion that possible cumulative average abnormal effects occur before the actual event date which would further suggest anticipation or alternatively no effect related to issuer rating announcements.
As for issuer rating downgrade announcements, the effect seems to be generally somewhat larger, yet still statistically insignificant. The effect seems to be higher at the (0,+5) interval and then return to almost the same level as with the upgrades.