Finance and Financial Management Commons^™

Are All Rivals Affected Equally By Bond Rating Downgrades?, Gary L. Caton, Jeremy Goh

Research Collection Lee Kong Chian School Of Business

We use revisions in analysts' earnings forecasts to examine how the bad news associated with a bond rating downgrade gets transferred from the downgraded company to its rivals. In general, we find that stock analysts revise their earnings expectations downward for rivals of companies with downgraded debt. However, the significance of the revision is limited to rivals of downgraded companies with non-investment grade debt only. For the rivals of companies with investment grade debt, we find no significant forecast revisions. We hypothesize that this differential impact is due to differing levels of market visibility. This is consistent with our finding …