Essays on the information content and announcement effects of credit rating changes

Numerous studies document that announcements of credit rating changes for corporate bonds also have information or price effects on the equity market. However, there is little research on the source of the information value of these announcements. This dissertation examines this important issue.;Essay 1 examines the role of information asymmetry in the announcement effects of credit rating changes. Firstly, I find that the information asymmetry of downgraded firms is much higher than that of upgraded firms, particularly around credit rating change announcements. I argue that information asymmetry is closely related to the direction of credit rating changes. Second, I document that the announcement effects of credit rating changes become stronger as firms' information asymmetry increases. Hence, the information value of downgrade announcements is greater than that of upgrade announcements. Moreover, in each downgrade and upgrade group, the informativeness of the credit rating change announcements is positively associated with the firms' information asymmetry. I confirm that these findings hold after controlling for other variables, especially credit ratings. This essay suggests that firms' information environment severely affects the announcement effects of credit rating changes.;However, in the stock market, there are other information signals than credit rating change announcements, such as stock analysts' recommendations, institutional investors' behaviors, and corporate insiders' trading.;Essay 2 examines the relationship between credit rating changes and insider trading. I find that prior insider trading is negatively related to credit rating changes. In other words, insiders are more likely to purchase shares before a downgrade rather than before an upgrade Thus, the typical investor is likely to face value-related signals that appear contradictory: for example, insider purchases and downgrades of credit ratings. I also document that both insider trades and credit rating changes have an additional power to explain market-adjusted stock returns, regardless of the negative relationship between credit rating changes and insider trading. The information value of insider trading is mainly coming from insider purchases, while that of credit rating changes is mostly driven by downgrades. Finally, I show that insider trading affects the information value of credit rating changes. However, the opposite is not true. This suggests that an investor may reevaluate the information value of credit rating changes depending on the signal from insider trading.