The impact of rating classifications on stock prices of Brazilian companies.
| Autor | Pagin, Fernanda |
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Introduction
Rating agencies are private institutions responsible for providing market opinions about the credit quality of companies or countries (Micu et al., 2006). Through a credit rating based on a series of specific and exclusive requirements of each agency, these institutions expose to the financial market their assessments according to the ability of a financial agent to pay their debts within the programmed period, and these evaluations may influence the decisionmaking process of investors and creditors (Murcia et al., 2013; Agarwal et al., 2016; Morkoetter et al., 2017).
Previous studies performed by Norden and Weber (2004), Morseth and Norgaard (2011); Galil and Soffer (2011), Freitas and Minardi (2013); Murcia et al., (2013), Finnerty et al., (2013); Bissoondoyal-Bheenick and Brooks (2015); and Kenjegaliev et al., (2016) sought to understand, directly or indirectly, whether ratings issued by the rating agencies are capable of provoking reactions in investors, interfering or not in the price of different financial assets. These studies have been developed in different parts of the world, covering completely different markets.
In Brazil, evidence of the impact of rating classifications on Brazilian company stock prices is incipient. Among the studies that have investigated the potential effects of credit ratings, Freitas and Minardi (2013) found significant impacts of the changes in the stock price of Latin American companies (Brazil, Argentina, Chile and Mexico), and the work of Murcia et al., (2013), which achieved results indicating that the ratings have information capable of causing abnormal returns (ARs) in stock prices, especially when these rating announcements involve downgrades. Another study that investigated the impact of the rating changes was developed by Antônio et al., (2018); the authors identified that there were no significant impacts on prices from the rating changes.
Considering the political-economic instability presented by Brazil in recent years and the fact that the Brazilian stock market is lean and with few participants, there is a question about how stock prices of companies listed on the Brasil Bolsa Balcão (B3) Exchange react to announcements of ratings assigned to companies, which can be expressed as follows: do rating announcements change the behaviour of the returns offered by changes in the Brazilian stock price?
The present study aims to identify if there is an impact of the rating announcements issued by the agencies on the returns of the stocks of Brazilian companies listed on B3, from August 2002 to August 2018, identifying which types of announcement (upgrade, downgrade or the same initial classification) cause variations in prices around the date of disclosure of the rating.
The importance of the study is related to the fact that the results may explain the causes of specific movements in the Brazilian financial market related to a source of information that may or may not be able to influence the decisions of the financial agents that operate in this market. The justification is centred on the idea that, for investors who somehow react to the announcements, it is relevant to understand the impact of rating classifications on companies, as access to such information allows for more conscious decision-making.
This paper differs from that of Freitas and Minardi (2013) because it deals exclusively with the Brazilian market, taking away any bias that the addition of another market could bring to the analysis of the results. This study is similar to that of Murcia et al., (2013), but the present study covers a more recent period, from August 2002 to August 2018, covering both the 2008 global financial crisis and the economic and political crisis of Brazil since 2015, as rating announcements may have greater informational relevance at times of crisis (Morseth and Norgaard, 2011).
The results indicate that rating announcements may be a factor influencing the stock returns of Brazilian companies around the day of the announcement. The behaviour of the abnormal accumulated return variations is different for each announcement type: in upgrades, the mean accumulated ARs increase in the days before the event, while in the downgrades, this increase occurs after the event. The results seem to point to a market that anticipates the information contained in the changes in credit ratings.
In addition to this introductory section, the paper is structured as follows. The theoretical framework is found in Section 2; the methodology is developed in Section 3; the results are presented in Section 4; discussion of the results can be found in Section 5; and Section 6 contains the conclusion.
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Literature review
2.1 Rating agencies and credit rating
Rating agencies, also known as financial rating agencies, play a fundamental role in the financial market and are responsible for assessing the risk of other companies, institutions or even countries. The evaluations of the rating agencies generate risk notes that are related to the ability of these companies and/or institutions to pay their debts within a specified time frame (Micu et al., 2006; Agarwal et al., 2016).
According to Sylla (2002) and Marandola (2016, p. 84), the emergence of the first credit rating agencies occurred in the USA in the early 20th century. Owing to the construction of the railroad system, projects existed requiring financing by local investors, but these investors did not have accurate information about the borrowers, and there was a need for a credit rating. Railway securities were, therefore, the first to earn a rating. Marandola (2016) states that over the years the credit rating business expanded, and by the 1990s almost all securities issued had a rating.
According to Marandola (2016), the rating agency industry is an oligopoly dominated by the pioneering Moody's and Standard and Poor's (S&P), as well as Fitch Ratings. They are responsible for a market share greater than 94% of the global market, and for years they were concentrated in the USA alone. In the mid-1970s, owing to the growing number of international investors, there was a need to standardize credibility, causing these agencies to grow their international presence and establish themselves in more than 40 countries.
"Rating agencies provide an opinion on an issuer's ability to meet its financial obligations" (Micu et al, 2006, p. 1). This opinion translates into a credit rating, which is intended to facilitate comparisons between different issuers. Although large agencies have their own risk rating characteristics, there are standardized categories of risk according to their correspondence, and the market understands these rankings. As an example, Moody's "Aaa" top rating is usually equivalent to "AAA" of S&P and Fitch Ratings. Therefore, a credit rating is not necessarily a measure of default risk, but an opinion.
2.2 Ratings and the behaviour of prices of financial assets: empirical evidence
Studies carried out in different markets and with distinct financial assets have brought important contributions to the understanding of the behaviour of asset prices and their relation to credit ratings, mainly supported by the market efficiency hypothesis, that prices must fully reflect any relevant information available at any time (Fama, 1970).
According to Norden and Weber (2004), any financial market that is related to credit risk (stocks, securities and derivatives) should have a rapid reaction when credit ratings bring new information. These authors developed an event study from 2000 to 2002 to verify if and how strongly the credit default swap (CDS) market responds to rating announcements. The data collected consisted of full market CDS spreads, corresponding stock prices and credit rating data. The zero day of the event corresponded to the day on which a certain type of rating event would occur, the event window is defined as 90 days before and 90 days after the event (--90, +90). The mean abnormal stock returns and the adjusted mean CDS spread changes were calculated for each agency and event type separately, at all event time intervals, through adjustment of the stock index and the market model adjusted by the stock return.
Norden and Weber (2004) showed that (i) both in the stock market and in the CDS market, there is an anticipation of the downgrades and revision of these classifications issued by the agencies; (ii) when combined analysis of different rating events in the agencies themselves or between two of them, the downgrade announcements issued by S&P's and Moody's are more significant in the two markets; (iii) abnormal performances are influenced by past rating levels and previous rating events in both markets, and in the case of CDS, there is also an influence of the mean pre-event rating of all agencies. In a study conducted in emerging markets, Ismailescu and Kazemi (2010) concluded that positive events had a greater impact on the CDS markets two days after the event. Besides, CDS markets anticipate negative events.
Galil and Soffer (2011) mention that among the methodological challenges encountered in the different studies on the market reactions to the announcements published by the rating agencies, the difficulty in differentiating the market responses to the different sources of information such as the ratings themselves, public media news and private information is highlighted. These authors suggest the idea that abnormal market behaviour based on a rating announcement should not be linked to that announcement only, as rating disclosures by specialized agencies may be contaminated by other information exposed simultaneously such as announcements from other agencies or related information presented in the public media.
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