| Summary: | This paper examines the informational content of rating changes in the Japanese market by analyzing stock price reactions before, during, and after announcements of unsolicited rating changes by Standard and Poor’s (S&P). Data from 1996 to 2005 are examined, and findings in this paper suggest that market’s reaction to unsolicited upgrades is significant, and negative abnormal return is observed. But due to the fact that overall market trend is declining and our results may have been affected by it, we cannot conclude whether credit upgrades do provide new information to the market. On the other hand, there is no significant market reaction associated with unsolicited downgrades. This supports our hypothesis that there should be no informational value for credit downgrades and no abnormal returns can be earned by using public information. Our results are inconsistent with previous studies that examined the U.S. market. Most of these studies conclude that upgrades merely are responses to information the market already knows, and stock prices will have already reflected such information, thus significant abnormal returns cannot be realized. However, downgrades do provide some information, and significant negative abnormal returns can be realized.
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