Lahore School of Economics

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The Informational Content of Credit Ratings Announcements in Pakistan
May 30, 2014

Birjees Rahat, Lahore School of Economics

Dr. Nawazish Mirza, Lahore School of Economics

Mahreen Mahmud,University of Kent

Farah Said, Lahore School of Economics

Credit rating agencies disseminate valuable information about their rated firms via their rating announcements. As privileged parties, credit rating agencies have access to nonpublic information about a firm for their forward looking credit quality opinion, hence increasing their value relevance to market investors. Using a sample of rated firms by JCR VIS rating company limited and PACRA the stock price reaction of rating announcements was investigated over a period of five years using an event study methodology. We document positive abnormal returns for ratings upgrade or positive outlook. Furthermore, our results for maintained or stable ratings were statistically insignificant followed by negative abnormal returns for downgrade or negative outlook. We report higher abnormal returns in the later period of our study demonstrating increasing value relevance of these announcements. The only exception to our results was the year 2007 – 2008 where we could not deduce significant results in favor of our hypothesis. We attribute these insignificant results to an increased uncertainty in the financial environment emanating from the sub-prime crisis and the alleged role of rating agencies that could have resulted in a distortion of value relevance of credit quality opinions.

Birjees Rahat is candidate of MBA Banking and Finance at Lahore School of Economics. She was team lead of Lahore School of Economics’ runners up participation in local competition of CFA Institute Research Challenge 2014.

Labels: Annual Conference, Managing Business in Pakistan, Research