THE INFORMATION CONTENT OF THE MALAYSIAN CORPORATE BOND RATING CHANGES

Abstract

This paper aims at investigating the impact of corporate bond rating changes on the common stock returns of the Malaysian corporations for the period spanning from January 1993 up to December 2003 inclusive. The market model with two competing specifications is used to measure the normal returns of firms. These are the standard event study methodology and the ARMA-GARCH lag specification of the market model. The initial finding is that both downgrades and upgrades trigger negative market reaction, albeit with some signs of information leakage. However, with some additional forensics we find that while downgrades elicit negative market response, upgrades induced no market reaction whatsoever. Moreover, the negative reaction following upgrades that we have seen at the initial finding was mainly due to the impact of the South East Asian financial crisis of the 1997/98.