Credit ratings and the cross-section of stock returns

Doron Avramov; Tarun Chordia; Gergana Jostova; Alexander Philipov

doi:10.1016/j.finmar.2009.01.005

Credit ratings and the cross-section of stock returns

Doron Avramov, Tarun Chordia, Gergana Jostova, Alexander Philipov^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

117 Scopus citations

Abstract

Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints.

Original language	English
Pages (from-to)	469-499
Number of pages	31
Journal	Journal of Financial Markets
Volume	12
Issue number	3
DOIs	https://doi.org/10.1016/j.finmar.2009.01.005
State	Published - Aug 2009
Externally published	Yes

Keywords

Anomalies
Asset pricing
Credit ratings
Credit risk

Access to Document

10.1016/j.finmar.2009.01.005

Cite this

@article{2b351745e631477a87bd25f25e4eecbb,

title = "Credit ratings and the cross-section of stock returns",

abstract = "Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints.",

keywords = "Anomalies, Asset pricing, Credit ratings, Credit risk",

author = "Doron Avramov and Tarun Chordia and Gergana Jostova and Alexander Philipov",

year = "2009",

month = aug,

doi = "10.1016/j.finmar.2009.01.005",

language = "אנגלית",

volume = "12",

pages = "469--499",

journal = "Journal of Financial Markets",

issn = "1386-4181",

publisher = "Elsevier",

number = "3",

}

TY - JOUR

T1 - Credit ratings and the cross-section of stock returns

AU - Avramov, Doron

AU - Chordia, Tarun

AU - Jostova, Gergana

AU - Philipov, Alexander

PY - 2009/8

Y1 - 2009/8

N2 - Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints.

AB - Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints.

KW - Anomalies

KW - Asset pricing

KW - Credit ratings

KW - Credit risk

UR - http://www.scopus.com/inward/record.url?scp=67649359745&partnerID=8YFLogxK

U2 - 10.1016/j.finmar.2009.01.005

DO - 10.1016/j.finmar.2009.01.005

M3 - ???researchoutput.researchoutputtypes.contributiontojournal.article???

AN - SCOPUS:67649359745

SN - 1386-4181

VL - 12

SP - 469

EP - 499

JO - Journal of Financial Markets

JF - Journal of Financial Markets

IS - 3

ER -

Credit ratings and the cross-section of stock returns

Abstract

Keywords

Access to Document

Other files and links

Fingerprint

Cite this