THE IMPACT OF BOND RATING CHANGES ON COMMON STOCKS AND BONDS: TESTS OF THE WEALTH REDISTRIBUTION HYPOTHESIS

Past studies on the impact of bond rating changes have focused on bonds or stocks and the information content of rating change announcements. This paper examines both bonds and stocks, and investigates the wealth redistribution effect as well as the existence of information content. The results imply that information content of "bad" news dominates firm downgradings, while the wealth redistribution effect dominates firm upgradings. Furthermore, this study attributes the lack of information content for bond upgradings to the offsetting effects of wealth redistribution and information content. Copyright 1988 by MIT Press.