“Big is beautiful” is forthcoming in the Journal of Risk Finance

A joint paper with Christian Fieberg, Armin Varmaz, and Jörg Prokop on the effect of bank’s credit rating changes on their relative stock prices is forthcoming in the Journal of Risk Finance, Volume 16, Issue 3 (2015).

Fieberg, C., Varmaz, A., Prokop, J. and Körner, F.M. (2015), Big is Beautiful: The Information Content of Bank Rating Changes, Journal of Risk Finance, 16(3).

Abstract

We study the information content of about 3,200 global bank rating changes before and after the Lehman shock in September 2008 from an equity investor’s perspective. Based on an event study approach, we find that rating upgrades are not associated with significant abnormal bank stock returns within a [−1,+1] event window, and that downgrades have a significantly negative effect for small banks only. In addition, when considering a [−20,+10] event window we observe an increase in negative cumulative abnormal returns following downgrades post- Lehman, which is largely driven by abnormal returns occurring well before, or well after the event date. Finally, the lack of a negative stock price reaction to large banks’ rating downgrades in the narrow [−1, +1] event window indicates that even post-Lehman these banks seem to be insulated from negative rating information, which we attribute to an implicit “too big to fail” subsidy anticipated by equity investors.

JEL classification: G14, G15, N2

Keywords: credit rating, event study, too big to fail, SIFI