How Do Rating Agencies’ Decisions Impact Stock Markets? A Meta‐analysis

Abstract

The purpose of this study is to examine how credit rating agencies’ decisions impact the stock market using a systematic and quantitative review of existing empirical studies. Specifically, we employ a meta‐regression analysis (MRA) to investigate the extent and nature of the effect of rating agencies’ decisions on the stock market. We survey 62 studies published between 1978 and 2015. Our first finding is that the cumulative average abnormal returns calculated from this empirical literature are affected by publication bias. After controlling for publication bias, the main findings of our meta‐analysis indicate that negative rating decisions cause statistically significant negative abnormal returns. This evidence suggests an informational effect. Our results also indicate that positive rating decisions do not have a significant effect. Finally, the MRA results reveal the importance of several factors related to primary study design, as well as to the nature of the data.

Transparency, Reproducibility, and the Credibility of Economics Research

“…Similar organizations play analogous roles in other disciplines, including the COS, which is most active within psychology (although it spans other fields), and the EGAP group. 47 At the same time, we have highlighted many open questions. The role that PAPs and study registration could or should play in observational empirical research-which comprises the vast majority of empirical economics work, even a couple of decades into the well-known shift toward experimental designs-as well as in structural econometric work, macroeconomics, and economic theory remains largely unexplored.…”

Local Public Finance Dynamics and Hurricane Shocks

“…18 Hubler et al (2019) discusses how variation in agencies' risk assessments have significant impacts on borrowing rates for corporations as well as municipalities. While credit rating agencies faced substantial scrutiny following the 2007 market crash for biased and subjective rating practices, particularly for mortgage-backed securities, ratings agencies like Moody's remain an integral role in financial markets because creditors rely on their publicly-available ratings in order to make investment decisions (Hubler et al, 2019;Cornaggia et al, 2018). 19 Default risk factors into the investment premium for municipal debt to a much greater degree than corporate debt.…”

Local public finance dynamics and hurricane shocks

“…22 Hubler et al (2019) discusses how variation in agencies' risk assessments have significant impacts on borrowing rates for corporations as well as municipalities. While credit rating agencies faced substantial scrutiny following the 2007 market crash for biased and subjective rating practices, particularly for mortgage-backed securities, ratings agencies like Moody's remain an integral role in financial markets because creditors rely on their publicly-available ratings in order to make investment decisions (Hubler et al, 2019;Cornaggia et al, 2018). 23 Default risk factors into the investment premium for municipal debt to a much greater degree than corporate debt.…”