The Effects of Financial Ratios Publication and Bond Rating Announcements on Stock Prices

Sammanfattning: This thesis consists of two papers in the field of empirical study on stock markets. In the first paper "An Empirical Study of the Correlation between Financial Ratios and Stock Price Volatility: A Case of China's A-shares 2000-2011" I study the correlation between five financial ratios and the stock price volatility with a focus on A-class shares in both of the mainland China's stock exchanges namely Shanghai Stock Exchange and Shenzhen Stock Exchange. The data ranges from 2000 to 2011. Empirical results suggest there is a negative correlation between ROA and volatility with slight variation across industries and years depending on the market conditions. In the second paper "The Effects of Bond Rating Announcements on Stock Prices: An Empirical Investigation Using Event Study", I examine whether bond rating changes contain valuable information and hence have significant impact on stock prices with a focus on the US stock market. The standard event study methodology is applied to analyze this issue. Besides t-statistics, a new nonparametric sign test statistics developed by Luoma (2011) is employed to test the null hypothesis of no event effect. The result suggests that stock market reacts positively to downgrades the bonds which are below investment grade prior to rating changes. For downgrades the bonds which are above investment grade, a significant negative market reaction is found. For upgrades, the empirical result shows no significant abnormal stock returns.