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The Adverse Effects of Systematic Leakage Ahead of Official Sovereign Debt Rating Announcements
Michaelides, Alexander, Andreas Milidonis, George P Nishiotis, and Panayiotis Papakyriakou.
Journal of Financial Economics 116 (3): 526-547.
Publication year: 2015
Rating agencies consult with local government officials several days prior to official announcements of sovereign debt rating changes.
This consultation period makes information leakage likely.
We find evidence of information leakage: statistically and economically significant, negative daily abnormal equity index returns before sovereign debt rating downgrade announcements.
These effects are more pronounced in countries with lower institutional quality, and persist during times with no downgrade rumors and no concurrent bad news in general.
A post-announcement reversal consistent with overreaction to pre-event downgrade rumors highlights the adverse effects of such leakage.
Information leakage before announcements should be a policy concern for capital market regulators around the globe.