Andreas Milidonis
University of Cyprus
The Adverse Effects of Systematic Leakage Ahead of Official Sovereign Debt Rating Announcements
- 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.