The Impact of Change in Credit Rating on Stock Return

Running head: THE IMPACT OF CHANGE IN CREDIT RETURN ON STOCK RETURN
The impact of change in credit rating on stock return
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THE IMPACT OF CHANGE IN CREDIT RETURN ON STOCK RETURN
Table of Contents
Introduction:...............................................................................................................................3
Research objectives:...................................................................................................................3
Research questions:....................................................................................................................3
Literature review:.......................................................................................................................3
Methodology:.............................................................................................................................3
Ethical considerations:...............................................................................................................3
Expected outcome:.....................................................................................................................3

THE IMPACT OF CHANGE IN CREDIT RETURN ON STOCK RETURN
Introduction:
The relationship between stock return and credit risk has been investigated by several
researchers and the financial market and the decision of investors is influenced to a
considerable degree because of the credit rating agencies. Credit ratings are the opinion that
is published by the credit rating agencies about the credit rail associated with the particular
stick. Opinions are expressed by them about the willingness and ability of the issuer so as to
meet the financial obligations according to the obligation terms. Investors, issuers and
investigators views that the good credit rating is important as it help in raising the cost of debt
that are used for raising the debt of company (Alsakka et al. 2015). Agency uses a unique
letter based score indicates the financial stability of the user and whether there is high or low
risk associated with the debt. There are three big credit rating agencies that dominate the
credit rating industry which comprised of Standard and Poor, Moody Inventors services and
Fitch group. The structured financial transactions make use of ratings such as mortgage
backed securities, asset backed securities and collateralized obligation of debt. The price of
stock is influenced by many factors such as economic factors, factors that are company
specific, demand and supply of stock. Furthermore, it is suggested by empirical evidence that
higher return is experienced by low credit risk firms compared to higher credit risk firms.
Researchers have been bemused by such observation as it contradicts that higher is associated
with higher return, which is the founding principle in finance (Barakat et al. 2018).
The current paper investigates the changes in credit rating agencies and the impact
that it has on the stock price by conducting the analysis of specific industries of UK and the
related stock price. Following the introduction, the current research paper is organized in
terms of other section that wrap up the literature that deals with analysis of the relationship
between stock price and rating of credit agencies. Research methodology that would be

THE IMPACT OF CHANGE IN CREDIT RETURN ON STOCK RETURN
employed in conducting the analysis is explained in the next section along with the ethical
factor that should be taken into account while conducting the research.
Research objectives:
The objective of research paper is to determine the impact of credit rating changes on
the equity stock. In addition to this, it is also required to ascertain that whether the firm or
industry is significant in determining the return on equity in response to change in credit
rating. Furthermore, it is required to ascertain whether the return on equity in response to
change in equity is determined by the rating change.
The reason to conduct this study is supported by various reason of interest. Firstly, if
the rating change is predictable by the investors and equity return being considerably
impacted by the rating change, then such identified relationship would be exploited by them
to make abnormal return. When explaining the observed empirical evidence, there is
somewhat breaking down of the financial theory. The role of credit rating agencies in the
capital market is also considered in this study by conducting the examination of informational
value that is generated by rating announcement (Casell et al. 2016).
Research questions:
The research questions that would be addressed in the current research paper are as
follows:
 Does any change in ratings by credit rating agencies enclosed new information?
 Does the announcement of credit rating impacts the return generated on stock
significantly?
 Does the rating provided by the credit rating agencies affect the valuation of the
stock?