Effects of Analysts’ Ratings on Insurer Stock Returns: Evidence of Asymmetric Responses

Abstract

We examine the information value contained in insurer rating changes. Using a contemporary event study approach, we document an asymmetric reaction of stock prices to rating changes: downgrades cut share prices by approximately 7 percent but upgrades have little significant effect. This result varies across agencies as share prices react more strongly to A.M. Best and Standard & Poor's downgrades than to Moody's. We observe a similar asymmetric reaction to rating changes subject to a common rating benchmark. Finally, we find that prices fall most dramatically when a rating downgrade from one rating agency follows a downgrade from another agency.

The Response of Bond Prices to Insurer Ratings Changes

“…Subsequently, beginning in the early 1990s, A.M. Best reformed its rating system and significantly improved the informational contents of its ratings. 22 Halek and Eckles (2010 24 The results from these studies imply that rating agencies have proprietary information regarding insurance companies and the insurance market is not strong-form efficient.…”

“…6 Pottier and Sommer (1999). 7 See for example, Pottier and Sommer (1999); Doherty and Phillips (2002); Adams et al (2003); Halek and Eckles (2010). 8 Adams et al (2003).…”

The Determinants of Rating Announcements Impact on Stock Markets during Crisis Periods: The Case of the 2008 Worldwide Financial Crisis

“…This is explained by investment constraints imposed on institutional investors that are required to sell speculative securities and to buy investment grade ones. Consequently, they react to upgrades and generate a significant increase on stock prices (Halek & Eckles, 2010).…”

Do U.S. Insurance Firms Offer the “Wrong” Incentives to Their Executives?

“…Traditionally, book variables have been the main focus, but more recently market variables have been employed to decompose total firm risk into systematic risk and unsystematic risk by using equity volatility, 1 firm beta, and residual volatility, respectively (e.g., Cheng, Elyasiani, and Jia, 2009; in the finance literature, Low, 2009). Moreover, structural changes in equity returns and return volatility have been associated with changes in default risk ratings (DRRs) suggesting that equity markets inform us of changes in the default risk profile of rated firms (e.g., Hand, Holthausen, and Leftwich, 1992; Goh and Ederington, 1993, 1999; Vassalou and Xing, 2005; Beaver, Shakespeare, and Soliman, 2006; Milidonis and Wang, 2007; Halek and Eckles, 2010).…”