Post- Credit Announcement Drift- An Empirical Assessment of Credit Rating Announcements and Their Influence on the US Equity Market

Sammanfattning: The aim of this study is twofold; (i) to investigate whether credit rating announcements result in a drift in stock prices on the US equity market and, if proven, (ii) how the drift is affected by firm size and the presence of extreme credit rating announcements. Using a sample of 2 922 credit rating announcements, this study examines the long-run stock performance subsequent to credit rating announcements, i.e. the post-credit announcement drift (PCAD), in the United States between 1992 and 2014. It is shown that abnormal stock returns remain up to 180 trading days and are asymmetrically distributed among downgrades and upgrades. In contrast to previous research, upgrades are followed by economically and statistically significant cumulative abnormal returns. The results are sensitive to market liquidity. Further, the magnitude and persistence of drift are, as expected, negatively correlated to firm size. However, extreme credit rating announcements cannot be confirmed to produce larger drift magnitude, contradictory to what is expected. Finally, our results indicate an overreaction following extreme credit rating announcements, contributing to the thinly research of extreme news drift persistence.