Firm ratings, momentum strategies, and crises: evidence from the US and Taiwanese stock markets

This paper investigates whether there is a link between momentum profitability and firm ratings. We follow traditional and practical (non-) investment-grade classifications to divide into three rating groups, high, median, and non investment-grade group (HIG, MIG, and NIG) since firm ratings express...

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Bibliographic Details
Published in:Financial markets and portfolio management 2012-12, Vol.26 (4), p.449-468
Main Author: Rueilin Lee, Nicholas
Format: Article
Language:English
Subjects:
Business and Management
Business cycles
Credit ratings
Credit risk
Emerging markets
Finance
Growth stocks
Institutional investments
Investors
Large cap investments
Management
New stock market listings
Profitability
Rates of return
Rating services
Ratings & rankings
Securities markets
Stock exchanges
Stock prices
Studies
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Summary:This paper investigates whether there is a link between momentum profitability and firm ratings. We follow traditional and practical (non-) investment-grade classifications to divide into three rating groups, high, median, and non investment-grade group (HIG, MIG, and NIG) since firm ratings express risk in relative rank order to contain valuable information. This study considers the US and Taiwanese stock markets. We find that firm ratings momentum strategies can even earn positive profits, larger than naïve momentum, supporting that firm ratings can be used to strengthen naive momentum effects. By comparisons, the US firm ratings momentum with NIG produces larger profits than HIG but opposite in direction and V-shaped pattern in Taiwan. With an examination of crises on firm ratings momentum, we find that firm ratings momentum indeed helps increase the payoff during (non-)crises although firm ratings momentum profits should be strong following non-crises states and weak following crises states. However, firm ratings momentum profits partially result from the predictability of business cycle, calendar months, and information asymmetries. Our results highlight the critical importance of using firm ratings screens in empirical momentum studies.
ISSN:1934-4554
2373-8529
DOI:10.1007/s11408-012-0195-0