Pages: 77-90

Abstract

This study aims to provide an investigation of the effect of bond rating changes on stock performance in Malaysia using event study and Dimson-Fowler Rorke (DFR) method. The study examines the rating changes of both Private Debt Securities (PDS) and Islamic Private Debt Securities (IPDS) based on ratings by RAM Rating Services Berhad (RAM) and Malaysian Rating Corporation Berhad (MARC). The empirical results indicate that when there is an announcement of rating upgrades for PDS, stock price react negatively and affect the firm returns while for IPDS the effect is negative but insignificant. On the other hand, the results for downgrades of PDS show that stock market responds negatively and significant while for IPDS it is negative but insignificant. This study also identifies determinants of abnormal return on bond announcement with associated firm-specific factors (firm size and leverage) and bond-specific factors (bond maturity). The results indicate that maturity for upgrade of IPDS exerts a significant and positive impact on abnormal return.