Credit Rating Changes and Stock Market Reaction : The Impact of Investor Sentiment

This study explores the impact of firm-specific investor sentiment (FSIS) on stock returns around the announcement of credit rating changes. Consistent with a large body of work in social sciences, we find that FSIS is asymmetrically related to stock returns during rating changes and its impact is more pronounced for rating downgrades. We further show that the impact of FSIS is more pronounced for speculative-grade firms and firms experiencing direct rating downgrades. Finally, we show that the impact of FSIS on stock returns around rating downgrades reverses over the post-announcement period