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Credit ratings and the cross-section of stock returns

journal contribution
posted on 2009-08-01, 00:00 authored by D Avramov, Tarun ChordiaTarun Chordia, G Jostova, A Philipov
Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints. © 2009 Elsevier B.V. All rights reserved.

History

Journal

Journal of Financial Markets

Volume

12

Issue

3

Pagination

469 - 499

Publisher

Elsevier

Location

United Kingdom

ISSN

1386-4181

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2009 Elsevier

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