Information availability influences the impact of rating events on sovereign bond markets

Much of the previous literature over the past decade has shown that negative rating events have a significant impact on sovereign bond spreads. However, in this thesis I show that, when accounting for freedom of press and the level of transparency in a country, the statistical significance of rating events decreases or even disappears. Thus, I argue that it is information availability which is crucial for the efficiency of financial markets. So when information is not always available and transparency is thus low, market participants are more dependent upon credit rating events to make their investment decisions. A rating event is therefore expected to have a significant impact in countries with little information availability, while no impact is expected in countries with ample information availability. I find evidence of this as the significant impact of positive rating events ceases and the impact of negative rating events decreases after accounting for information availability. Effects of rating events remain only significant for sovereign 5-year maturity bond spreads although muted, while 1- and 10-year bonds are no longer significantly affected. Finally, by accounting for the influence of the recent financial crisis, I find that the impact of negative rating events on sovereign bond markets becomes even more decreased. This shows that markets tend to have larger spreads in times of a crisis.