How does firm transparency affect investors' reaction around rating changes?

Abstract

This paper investigates the effect of corporate transparency on the market reaction following a rating change. A regression analysis on several samples constituted of rating actions is used to examine the characteristics that might foster corporate transparency. The purpose is to identify the degree of influence that it could have on the investors’ perception following a rating change. Our findings show that corporate transparency actually influences the market response to a rating change. There are two significant relations between its proxies and rating changes in the regression of the cumulative abnormal returns. The results also reveal that there is no significant response to rating upgrades as widely acknowledged in the literature. Finally, the absolute versions of the discretionary accruals do not present any significant influence contrary to the raw and adjusted versions proposed by Kothari et al. (2005) of the discretionary accruals.