In this paper we examine how well
CreditWatch is used by credit rating agencies to balance two conflicting goals:
rating timeliness and rating stability. Examining equity market reactions
around CreditWatch events in 2002-2005, we find evidence that while CreditWatch
has improved rating timeliness, its intended purpose has not been completely
achieved. Equity prices start to change days before companies are listed on
CreditWatch and abnormal equity returns of firms prior to being listed on
CreditWatch are effective predictors of the ultimate change in ratings. The
findings in the study suggest that in the pursuit of rating stability, rating
agencies may have sacrificed rating timeliness.
Cite this paper
Gu, J. , Jones, J. and Liu, P. (2014) Do Credit Rating Agencies Sacrifice Timeliness by Pursuing Rating Stability? Evidence from Equity Market Reactions to CreditWatch Events. Theoretical Economics Letters
, 311-322. doi: 10.4236/tel.2014.45042
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