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 journalArticlepeer-review

115 Scopus citations


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 languageAmerican English
Pages (from-to)469-499
Number of pages31
JournalJournal of Financial Markets
Issue number3
StatePublished - Aug 2009
Externally publishedYes


  • Anomalies
  • Asset pricing
  • Credit ratings
  • Credit risk


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