Reactions of Japanese markets to changes in credit ratings by global and local agencies

• Published in: Journal of banking & finance 2006-03, Vol.30 (3), p.1007-1021
• Main Authors: Li, Joanne, Shin, Yoon S., Moore, William T.
• Format: Article
• Language: English
• Subjects: Correlation analysis; Credit rating; Credit ratings; Economic impact; Empirical tests; Financial information; International capital market; International finance; Japan; Market analysis; Rating agencies; Rating bureaus; Rating services; Stock exchange; Stock exchanges; Stock prices; Studies; Tokyo Stock Exchange
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2005.05.026

We examine data from the mid-1980s to 2003 to investigate whether stock prices set on the Tokyo Stock Exchange for Japanese firms react more strongly to changes in credit ratings of global rating agencies than of local agencies. This offers a strong test of relative influence of the two groups of rating agencies. We hypothesize that global raters will have more influence, but given that the two global agencies, Moody’s and Standard and Poors, are headquartered in the United States, analysis of stocks of Japanese firms listed on US exchanges would confound the results to the extent there is a home bias for raters. We find that global agencies are more influential than the two major local raters, Japan Rating and Investment Information and Japan Credit Rating Agency, for rating downgrades. Thus for credit downgrades, global raters are more influential than local ones even in the local market. Consistent with previous research, we find that upgrades are benign events, and this holds true for global as well as local agencies.