Has S&P's impact on equity returns changed due to the financial crisis?

Sammanfattning: Since the financial crisis, rating agencies have taken a lot of negative criticism, when skewed incentive systems may have led to overrated securities causing asymmetric information in the market. Despite this criticism, CRAs still play an essential role in the market place today. This thesis focuses on the impact of changes in credit rating on equity prices by employing an event study method on companies downgraded by S&P pre and post the financial crisis (07-08). We calculate cumulative abnormal returns based on the CAPM model and then make a cross-sectional analysis using an event window 5 days before to 5 days after the announcement. Data shows that pre- crisis, downgrades have a significant impact on equity returns around the announcement date at the 1% level. Surprisingly this coefficient is positive for the post sample at the 10% level. Furthermore we find that the downgrade coefficients are significantly different between the two periods of time, suggesting that S&P's impact on equity prices has decreased due to the financial crisis.