Do sovereign credit rating announcements influence excess bond and equity returns in Africa?

Abstract

Purpose The purpose of this paper is to examine whether new sovereign credit rating (SCR) changes are valuable, and relevant information is provided to bond and equity markets in 30 African countries that received an SCR during the period 1994–2014. Design/methodology/approach This study applies a combination of GARCH models and event study techniques. Findings This study shows that the financial markets do not significantly react to SCR announcements, possibly because these African markets are already perceived to be risky. Research limitations/implications At last, a significant portion of Africa’s sovereign debt is held by foreign investors (Arslanalp and Tsuda, 2014) who commonly preclude asset managers from investing in low SCR grades. Thus, an unfavorable SCR announcement could lead to a withdrawal of these funds, which could significantly alter both fiscal and monetary policies in the economy. Practical implications SCRs is immaterial to investors holding African securities. Social implications Although financial markets are weakly responsive to SCR announcements, they appear to be informationally important in the operation of stocks and bond markets in Africa. Therefore, governments should appreciate the long-term information exchange between investors and borrowers, and the consequential nature of credit ratings in Africa’s nascent financial markets in order to proactively manage the risks of negative ratings. Originality/value Studies on credit rating effects on Africa markets are rare.