HEC Research Papers Series,
HEC Paris

Abstract: Do rating announcements reduce information asymmetries? We investigate the effect of rating disclosures on the volatility and liquidity of the US bond market. Although rating agencies' decisions often are anticipated by credit spread changes, we show that in the case of no regulatory change their release can reduce volatility and the bid-ask spread. This reduction is stronger when the rating agency announcement has been anticipated by the market, namely, after downgrades, whereas upgrades trigger mixed reaction. These findings are consistent with the predictions of a simple sequential trade model with event uncertainty, and noise and informed traders.

Keywords: rating; volatility; bid-ask spread; price discovery process

JEL-codes: G10; G14; G24

59 pages, April 4, 2022

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