Compensation Incentives of Credit Rating Agencies and Predictability of Changes in Bond Ratings...

By: Andreas Milidonis, University Of Cyprus |


The timeliness of changes in corporate bond ratings and financial strength ratings that correspond to the sample of publicly traded insurance firms (1997-2007) is examined in this paper. Results suggest that Egan Jones Ratings (EJR) leads both Standard & Poor's and Fitch. Focusing on industry-adjusted returns before and after downgrades, there is evidence that investors may benefit by unconditionally following downgrades by EJR, since their downgrades are followed by a thirty-day period of economically significant negative returns. This negative, post-announcement drift is not present in the sample of downgrades by Fitch and Standard & Poor’s.

Andreas Milidonis, the University of Cyprus,
September 2012.


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