Abstract
This paper analyses the effect of rating signals on banks’ stock market returns in European peripheral countries during the period 2002–2012. The results obtained show that investors do respond to rating announcements, and that before the financial crisis such announcements had the opposite effect to what would be expected according to the financial situation of the entities evaluated due to the investors’ appetite for risk. On the other hand, since the financial crisis investors’ risk aversion has increased, as banks’ rating signals have the expected effect on the stock market return given the financial situation of the entities evaluated. Analysis of the causal relationship between rating signals and financial markets indicates that the rating agencies do not strictly follow a “through-the-cycle” strategy.
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Notes
- 1.
For example, Moody’s did not change Greece’s rating from 2003 until December 2009. In the subsequent 15 months Moody’s downgraded Greece’s rating by 15 points, situating it on a level close to default (from A2 to C).
- 2.
The date used for the start of the crisis is August 2007 due to the first strong liquidity tensions occurring in the markets and the consequent injection of liquidity agreed by the European Central Bank on 2 August 2007. This period of crisis is also consistent with the study by Filardo et al. (2010) which defines the first turbulences in the financial markets as dating from the third quarter of 2007.
- 3.
0.5 points are added (subtracted) in the case of positive (negative) watchlists because this type of signal indicates the possibility of rating changes in the short term (three months). On the other hand, in the case of outlooks 0.25 points are added (subtracted) since these signals indicate a possible upgrade (downgrade) of the ratings in the long term (from one to two years).
- 4.
In the case of public holidays, the price is taken to be that corresponding to the last day of quotation, t-1, for the calculation of the return on shares.
- 5.
These models are estimated following a data pool model. The proportion of the variance of the disturbance that is explained by random effects is also analysed to determine if it was appropriate to consider a random effects model or a fixed effects model. The results showed that in all cases this proportion is nil and consequently it is not appropriate to consider a random effects model. Furthermore, the Breusch and Pagan Lagrangian test of whether it is appropriate to consider a simple OLS with fixed effects as against a random-effects model indicates that in all cases it is preferable to consider a simple OLS with individual effects rather than a random-effects model. To determine whether or not the individual effects associated with each bank are significant, different tests were performed to consider if the individual effects were jointly significant. The results showed that they were not significant. Therefore, the different tests indicate that it is preferable to estimate a data pool model rather than a panel data model.
- 6.
The number of observations on each regression does not coincide with the number of observations in Table 8.1 because in some cases, different events occur at the same time. For example, the issuer rating of the Spanish bank Banco Popular was downgraded from BBB− to BB+ and placed in negative outlook on 25 May 2012.
- 7.
. The sovereign rating upgrades in the previous 180 days are omitted because, as we can observe in Table 8.2, the number of these signals during the crisis is null.
- 8.
. The sovereign rating downgrades of the previous 180 days are omitted because, as we can observe in Table 8.2, the number of these signals in the period before the crisis is null.
- 9.
Some examples of interventions in Spain are Caja Castilla La Mancha and Caja de Ahorros del Mediterráneo. Notable examples in other countries are the intervention of the Royal Bank of Scotland, UBS, Morgan Stanley and the Bank of Ireland.
- 10.
Blundell-Wignall and Slovik (2010) find evidence that United Kingdom banks have a high exposure to the sovereign debt of the PIIGS: Spain (€5,916 m), Italy (€10,029 m), Portugal (€2,571 m), Ireland (€5,580 m) and Greece (€4,131 m). Consequently, a downgrade of the sovereign rating of these countries will affect the asset situation of British banks.
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Muñoz, C.S. (2016). Stock Returns and Bank Ratings in the PIIGS. In: Carbó Valverde, S., Cuadros Solas, P., Rodríguez Fernández, F. (eds) Liquidity Risk, Efficiency and New Bank Business Models . Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-30819-7_8
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