Do Rating Agencies Confirm or Surprise the Market? Market Efficiency Hypothesis vs Conspiracy Theory

This paper examines the impact of credit ratings for sovereign bonds on bond price. We test whether credit rating agencies' announcements surprise the market as predicted by the conspiracy theory or confirm what the market has priced already as postulated by the market efficiency hypothesis. We apply an event-parameter study to a CAPM-like model using a sample of 43 bond indexes over the period 1962-2013. The post-announcement reaction is three times larger than the pre-announcement adjustment, in particular for negative assessments. The relationship is stronger in Eurozone and intensifies since 2000. Our results are robust to different estimators, specifications, and variables definitions and weaken gradually with the increase in the event window size. This empirical evidence supports the conspiracy theory and is in line with the increasing power of credit rating agencies