The Impact of Credit Rating Changes: An Empirical Study of the Stock Market Reaction to Credit Rating Change Announcements in the European Insurance Market

Abstract

This thesis investigates the effect of credit rating change announcements on stock returns. Most of the previous literature on the topic studies the effect in the US market, as well as including a broad-based sample with regards to industries. This thesis adds to the existing literature by researching the stock effect on European insurance companies. The insurance industry was specifically chosen due to its presumed higher sensitivity to rating changes. The event study methodology, as described by MacKinlay (1997), was used to investigate the topic. Rating change announcements from S&P, Moody's, and Fitch are analysed from 2009 to 2021. The general findings from the study are that rating downgrades lead to a significantly negative stock price reaction, while upgrades lead to a less significant positive reaction. The results also indicate that the impact of rating announcements varies somewhat, depending on the rating agency giving the rating. Rating downgrades from S&P seem to yield a significantly stronger reaction than the two other rating agencies. In addition to this, the results suggest that rating downgrades over multiple levels cause a stronger market reaction than rating changes over one level. Furthermore, rating upgrades moving a credit rating from speculative grade to investment grade show a significantly stronger market reaction.