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Asian Review of Financial Research, Vol., No..
pp.170~207
pp.170~207
The Information Value of Credit Rating Changes and Insider Trading
Taekyu Kim Assistant Professor, College of Business at Hallym University
Jungsoon Shin Assistant Professor, School of Management at Ewha Womans University
This paper examines the relationship between credit rating changes, insider trading, and future stock returns. We find that prior insider trading is negatively related to credit rating changes. Insiders are more likely to purchase shares before a downgrade rather than before an upgrade. Thus, an investor is likely to face information signals that seem to systematically disagree on the value of the firm simultaneously: for example, insider purchases and downgrades. We also document that both insider trading and credit rating changes have additional power to explain market-adjusted stock returns, regardless of the negative relationship between credit rating changes and insider trading. Finally, we show that the information value of insider trading is mainly coming from insider purchases, while that of credit rating changes is mostly driven by credit rating downgrades.
Taekyu Kim
Jungsoon Shin
This paper examines the relationship between credit rating changes, insider trading, and future stock returns. We find that prior insider trading is negatively related to credit rating changes. Insiders are more likely to purchase shares before a downgrade rather than before an upgrade. Thus, an investor is likely to face information signals that seem to systematically disagree on the value of the firm simultaneously: for example, insider purchases and downgrades. We also document that both insider trading and credit rating changes have additional power to explain market-adjusted stock returns, regardless of the negative relationship between credit rating changes and insider trading. Finally, we show that the information value of insider trading is mainly coming from insider purchases, while that of credit rating changes is mostly driven by credit rating downgrades.
Information value,Credit rating changes,Insiders,Insider trading
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