Information Content of Investment Grade Ratings

Abstract

The efficient-market hypothesis states that financial markets are informationally efficient and no one can consistently achieve returns in excess of average market returns, given the information available at the time the investment is made. If the market is semi-strong efficient, the publicly available information like the credit rating should be reflected in the rated firms current stock prices. According tosemi-strong-form efficiency, the share prices adjust to publicly available new information very quickly and that abnormal returns cannot be earned by trading on publicly available information.  This study examines the information content of investment grade ratings published in Indian market. The result of study reveals that returns associated with the announcement of investment grade ratings are insignificant and Indian capital market is efficient in semi strong form in processing the new information.