The Impact of Sovereign Rating News on European Banks
Posted: 5 Aug 2013
Date Written: August 4, 2013
Abstract
Although it is evident that sovereign rating is important for domestic banks, the impact of sovereign rating news on financial company shares has not yet been studied. This paper fills this gap by examining the spillover effect of Euro-zone sovereign rating changes announced by Standard and Poor’s, Moody’s, and Fitch on domestic bank share prices in the period 2002-2012. This spillover effect appears strongly negative in the case of downgrades, but insignificant for upgrades. Bank losses following sovereign downgrades are greater during the financial crisis of 2008 and in the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). Surprisingly, announcement of sovereign negative credit watches results in increased bank stock returns. Bank share price losses following sovereign downgrades increase as bank leverage, efficiency, and equity performance increase, and they decrease as bank systematic risk and payout ratio increase. On the contrary, bank share prices increase following sovereign negative credit watches, as leverage and bank size decrease and as bank systematic risk increases.
Keywords: sovereign rating change, European banks, event study, spillovers
JEL Classification: G14, G15, G21, G24
Suggested Citation: Suggested Citation
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