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The adverse effects of systematic leakage ahead of official sovereign debt rating announcements

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Title: The adverse effects of systematic leakage ahead of official sovereign debt rating announcements
Authors: Michaelides, A
Milidonis, A
Nishiotis, G
Papakyriacou, P
Item Type: Journal Article
Abstract: Rating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes, making information leakage likely. Using cross-country data from 1988 to 2012, we find evidence of information leakage. In particular, we find statistically and economically significant negative daily abnormal stock index returns prior to downgrade announcements. These effects are more pronounced in countries with lower institutional quality, and they persist during times with no downgrade rumors and no concurrent bad news in general. A mild post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage and, thus, should be a policy concern for capital market regulators.
Issue Date: Jun-2015
Date of Acceptance: 26-Aug-2014
URI: http://hdl.handle.net/10044/1/19395
DOI: 10.1016/j.jfineco.2014.12.005
ISSN: 0304-405X
Publisher: Elsevier
Start Page: 526
End Page: 547
Journal / Book Title: Journal of Financial Economics
Volume: 116
Issue: 3
Copyright Statement: © 2015 Published by Elsevier B.V. NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Financial Economics . Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in JOURNAL OF FINANCIAL ECONOMICS, (2015) DOI: 10.1016/j.jfineco.2014.12.005
Sponsor/Funder: Commission of the European Communities
Funder's Grant Number: PCIG14-GA-2013-631814
Keywords: Social Sciences
Business, Finance
Business & Economics
Sovereign ratings
Event studies
Institutional quality
Information leakage
1402 Applied Economics
1502 Banking, Finance and Investment
1606 Political Science
Publication Status: Published
Online Publication Date: 2015-01-08
Appears in Collections:Imperial College Business School