On the Impact of Bond's Rating Changes on the Firm's Stock Price

Abstract

In the following research I have studied how bond rating changes that was conducted by Israel leading rating agency is affecting the firm's stocks abnormal returns. In order to do so I have examined 9 bonds upgrades and 9 downgrades from December 2012 until October 2013. For each of the stocks I have calculated three times abnormal return 30 days before and 60 days after the event. Results show that bond's rating downgrades has a more significant effect on the socks abnormal return than upgrades. This is especially true for bonds that were downgraded from Lower-medium grade to Non- Investment grade. Moreover, the downgrade effect on the stock price is diminishing after 45 days.