The impact of bond rating downgrades on common stock prices in China

In this paper, we examine how bond rating downgrades affect common stock prices in China by using the data of all the bond rating downgrades in China during the period from 1 January 2008 to 30 May 2016. To provide empirical evidence for the theory in Goh and Ederington (1993), we classify the samples according to the downgrade reasons and the bonds' time to maturity and examine the abnormal returns of each group in different windows. The empirical results show that the downgrades due to deteriorating financial prospects have a negative effect on stock prices and that this effect lags behind. The downgrades due to leverage changes have no significant effect on stock prices. Meanwhile, the variation in the decrease in stock prices due to rating downgrades of bonds that will mature within three years is significantly larger than that of those which will mature after more than three years.