Research
Job Market Paper : What Do Credit Rating Changes Tell Us About Stock Mispricing?
Datasets: S&P Credit Ratings, CRSP, Compustat, Eventus, WRDS Event Study
Abstract: In this paper, I present evidence that credit rating change announcements reveal a novel form of value-relevant information to the market. Specifically, issuer credit rating downgrades (upgrades) inform the market about equity underpricing (overpricing). This is reflected by a significant association between a firm’s downgrade (upgrade) and increase (decrease) in the stock underpricing (overpricing). These results are robust to periods of high and low investor sentiment and instrumental variable analysis. Furthermore, I show how this mispricing gets corrected over time, by analyzing the returns after the rating announcements. The returns also have a significant association with the downgrade and upgrade events, implying predictable mispricing correction. Downgrades witness negative stock returns prior to the announcement and immediately following them but positive stock returns subsequently. However, upgrades are only followed by negative returns. Stock returns following the announcements are associated positively with downgrades and negatively with upgrades. Further analysis reveals that credit rating downgrades result in greater mispricing correction (higher stock returns) for firms with higher disaggregation quality of financial statements. Overall, the results suggest that credit rating changes are important in correcting mispricing and higher quality disclosures are vital for rational investors when they reassess the latest information and subsequently correct mispricing after downgrades. These results have important implications for the disclosure policy of the firms. Firms anticipating downgrades should enhance the quality of their financial statements to improve their stock returns following downgrade events.
Does Disaggregation of Financial Information Affect Stock Mispricing?
Datasets: CRSP, Compustat, WRDS Event Study
Abstract: The literature suggests that disaggregated data is more useful for valuation. In this paper I study if disaggregated accounting data from the annual statements, proxied by Disaggregation Quality (DQ), is useful for valuation. I find that DQ corrects mispricing of the most overpriced and underpriced stocks. Using a portfolio-based approach I show that the alphas are significantly positive for stocks with the highest DQ, and this effect is not subsumed by the firm’s size. Furthermore, the factor alphas are significantly positive for the highest DQ portfolios during the next fiscal year, irrespective of the amount of mispricing. Finally, through Fama-Macbeth regressions, I show that, in the cross-section, DQ is associated positively with the returns of the first month post SEC publication date for those deciles of stocks that are not extremely mispriced. Overall, my findings suggest that higher disaggregation quality corrects extreme mispricing, has value-relevance, and generates significantly positive alpha, except for the most mispriced stocks, immediately after annual financial statements are accepted by the SEC or get published on the SEC’s website. This paper suggests that extremely mispriced firms can reduce their mispricing by releasing more disaggregated financial statements. Further, firms that are not extremely mispriced can improve their stock performance by improving their disclosures through higher disaggregation.
Teaching Portfolio
FINA 3313 - Business Finance, Fall 2023, In-person
FINA 4319 - Financial Derivatives (4.4/5), Spring 2023, In-person
FINA 3313 - Business Finance (4.1/5), Fall 2022 In-person
FINA 3315 - Investments (4.0/5), Fall 2022 In-person
UNIV-BU 1131 - Student Success, Fall 2022 In-person
FINA 3315 - Investments (4.6/5), Summer 2022 In-person
FINA 3313 - Business Finance (4.0/5), Spring 2022 In-person
UNIV-BU 1101- Career Preparation & Student Success, Spring 2022 In-person
FINA 3313 - Business Finance (3.2/5), Fall 2021 Hybrid, due to reduced Covid restrictions
FINA 3313 - Business Finance (2.9/5), Spring 2021 Online, due to Covid restrictions
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