Conteudo informacional de ratings de credito no Brasil: um estudo de evento.
| Autor | Cruz de Souza Murcia, Flavia |
| Cargo | Articulo en ingles |
The Informational Content of Credit Ratings in Brazil: An Event Study
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Introduction
One strand of credit rating studies examine whether ratings announcements affect stock and bond prices of public companies (Poon & Chan, 2008). On an efficient market, rating changes will only have an effect if they contain new information. Using regression models and/or event studies, these studies examine the instantaneous effect of rating changes in the prices of securities.
According to Li et al. (2003), studies on the informational content of ratings seek to answer two main questions: Do rating announcements have impact on the stock market? And if so, how does the market reacts to different types of credit rating announcements? For Barron, Clare and Thomas (1997), the motivation of these studies has been to evaluate the relevance of credit ratings to capital market efficiency.
In this line of thinking, our study aims to analyze the impact of credit rating announcements in the stock prices of public companies in the Brazilian market. The motivation for conducting this study is based on inconclusive findings in the existing literature, due to mixed prior results, as well as the uniqueness presented by the Brazilian market, as most studies do not address emerging economies.
Prior literature evidences a lack of consensus regarding the information content of credit rating. For Li et al. (2003) the informational value of rating agencies is a controversial and inconclusive issue. Previous research on the informational content of announcements issued has shown different results (Pinches & Singleton, 1978, Jorion et al., 2005, Creighton et al., 2007).
According to Calderoni et al. (2009) some studies in the 80s and 90s conducted in the United States presented evidence that only downgrades have reliable information content. In other words, there seems to be an asymmetric effect, where negative news (downgrades) affect stock prices, but good news (upgrades) don't.
For Vassalou & Xing (2003), these results are considered confusing, because there would be no reason for stock returns to react to downgrades and upgrades asymmetrically. According to Jorion et al. (2005), it is unclear why only the negative information has value.
On the other hand, the empirical evidence on downgrade is also imprecise. Griffin & Sanvicente (1982), for example, found that poor stock performance after credit rating downgrades emerges constantly in the four weeks after the announcement. Holthausen & Leftwich (1986) also observed a decrease in stock price, but entirely focused on the announcement day and the day after the announcement.
For Creighton et al. (2007), despite the fact that studies reveal that security prices react to rating announcements, the magnitude of the response is usually very small, and the vast majority of adjustments in prices around announcements ratings occurs in the weeks or months prior to the announcement. According to Richards & Deddouche (2003), many studies have found statistically significant abnormal returns in the announcement periods, which are often small, especially in comparison to the abnormal returns for periods of pre-announcement. As stated, existing literature on the subject is quite controversial.
The justification for conducting our research also relies on the fact that the great majority of the previous studies have been developed in the U.S., UK and Australia; so the effect on other countries, especially in emerging markets, is still unclear (Li et al., 2003). According to Creighton et al. (2007) most previous studies have used data from the United States, where there is a more significant role for credit ratings.
Furthermore, Han et al. (2009) argue that credit ratings, particularly those issued by Standard & Poor's and Moody's, are critical to international investors in corporate debt from emerging markets because:
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financial information in emerging markets are much less transparent than in developed markets;
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there are no reliable financial organizations in emerging markets that can certify the eligibility of a debt to international investors;
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many foreign institutional investors are not allowed to invest in speculative-grade bonds in emerging markets; and
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bank regulators use ratings for financial regulation and supervision as well as capital adequacy rules. We found a single study that used only Brazilian companies in the existing literature: Callado et al. (2008) analyzed the relationship between the stock returns of banks listed on the BM&FBovespa and the public announcement of the first risk assessment issued by credit rating agencies, i.e., the initial rating. They found no significant evidence supporting the hypothesis that the initial credit rating caused abnormal returns in the analyzed sample.
However, the study's sample was composed of only seven companies. Also, authors only used descriptive statistics, like means of abnormal returns to analyze their results. In this sense, our paper expands Callado et al. (2008) study as we have used a larger sample, abnormal returns calculated by both Market Model and CAPM and more robust statistical methods as we conduct an event study and multivariate analysis. We have also tested all three types of rating announcement (initial rating, upgrades and downgrades) and three windows (-1, +1; -5, +5; -10, +10).
For the reasons outlined, we believe there is a gap in existing literature, especially regarding the Brazilian market, which has specific characteristics that can lead to different results than those founded in other markets. Note, for example, that Brazil adopts a Code Law legal system, mainly derived from Portugal. According to prior research regarding "Law and Finance" (La Porta et al., 1997, 1999, 2000, 2002), code law countries have: (i) less developed equity markets; (ii) firms with more concentrated control; (iii) lower number of publicly traded companies and smaller number of initial public offering each year; (iv) more companies penalized by investors in the valuation process; and (v) companies that pay less dividends.
For Lopes & Walker (2012), the Brazilian market is characterized by low enforcement, incentives for manipulation of financial statements due to tax influence, instable capital market and poor governance standards. In this sense, the role of credit rating is not quite clear.
Moreover, Brazil has been gaining economy importance in the global economy, due to high economic growth rates presented in recent years, inflation under control and stability of financial institutions. In 2012, Brazil became the 7th largest economy. In short, the Brazilian market presents a unique setting for conducting studies on credit rating.
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Literature Review
Investors are often interested in measuring the risk of a company or a country to decide resource allocation (Sih, 2006). According to Callado et al. (2008) since the 80s, the demand for information related to credit risk has increased dramatically in the international financial market, and from that demand, several methodologies have been developed.
Credit rating expresses the rating agency's opinion regarding the ability and willingness of an obligor to meet its financial obligations on time (Standard & Poor's, 2011). For Gray et al. (2006), it is an assessment of the company's ability to make payments on time. According to Kim & Gu (2004) the rating of a debt security is an indicator of the default risk of a company. Studies conducted by agencies have demonstrated that there is a clear correlation between credit ratings and the probability of a subsequent default.
The literature suggests that credit ratings serve two purposes: they certify the financial condition of a company (initial credit rating) and signal a change in the prevailing financial condition (rating changes, i.e., upgrades and downgrades). For Li et al. (2003) rating agencies do provide valuable information to investors, but the usefulness provided has decreased in recent years due to the economic globalization and rapid technological development.
Credit ratings are defined by symbols, and the same symbols are used for both corporate and securities ratings. The settings are similar to each symbol expressing the default risk, i.e., the probability of non-payment of principal and interest on the debt (Camargo, 2009). Table 1 illustrates rating categories used by the three main agencies: Standard and Poor's, Fitch and Moody's.
Standard and Poor's and Fitch emphasize that ratings from AA to CCC may be modified by the addition of positive (+) and minus (-) signs to show the relative position within categories. Moody's (2011) notes that ratings can also be changed from the addition of the numbers 1, 2 and 3 for each category from Aa through Caa, in order to show the relative position of each rate within the category.
It is worth mentioning that once the rating is issued, it is subject to review and may be revised in response to changes in economic and financial conditions of the company or security. Thus, agencies continually reevaluate companies that are rated as a normal part of their reviewing process. Their aim is to evaluate if financial conditions surrounding the company have improved (deteriorated) sufficiently to demonstrate an increase (decrease) in the rating.
Ratings issued by the agencies may also be reviewed because of a specific event such as the announcement of a new debt financing, new equity issues, mergers, or a significant internal reorganization (Pinches &...
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