The Effect of Sovereign Credit Rating Changes on Emerging Stock Markets

47 Pages Posted: 19 Mar 2005

See all articles by Rodolfo Martell

Rodolfo Martell

Barclays Global Investors; Purdue University - Krannert School of Management

Date Written: March 12, 2005


This paper studies the effect of sovereign credit rating changes issued by Standard and Poor's and Moody's on the cross section of domestically traded stocks. We first establish, consistent with earlier literature that analyzed similar phenomena in the U.S. (e.g. Holthausen and Leftwich, 1986; Goh and Ederington, 1993), that local stock markets react only to news of sovereign credit rating downgrades. Cumulative abnormal returns of stock indices also show that investors react only to rating announcements made by Standard & Poor's. We then study the cross sectional variation of the abnormal returns of individual firms associated with sovereign credit rating changes. We find that larger firms experience larger stock price drops after a sovereign credit downgrade. Also, firms located in more developed emerging countries experience smaller stock price reductions following sovereign credit downgrades. Finally, we document that firms that had access to international capital markets experience larger abnormal returns than firms that do not have access to international financial markets.

Keywords: Sovereign credit ratings, emerging markets, international capital markets

JEL Classification: F02, F20, F30

Suggested Citation

Martell, Rodolfo, The Effect of Sovereign Credit Rating Changes on Emerging Stock Markets (March 12, 2005). Available at SSRN: or

Rodolfo Martell (Contact Author)

Barclays Global Investors ( email )

45 Fremont Street
San Francisco, CA 94105
United States

Purdue University - Krannert School of Management ( email )

403 West State Street
KRAN 477
West Lafayette, IN 47907-2056
United States

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