The effect on share prices listed on the JSE due to a non-investment grade announcement in the short term

Abstract

This report examines the effect on share prices listed on the JSE due to a sovereign downgrade announcement to non-investment status in the short term. More specifically, it tests the Index response to such an announcement; the presence of information leakage prior to the announcement date; the extent to which each industry was affected; and how each sector within the financial industry responded to the announcement. Actual returns were statistically tested for validity and reliability where after an event study methodology approach was followed. The event window was defined as from 30 days prior to 30 days after the announcement date. Abnormal cumulative average abnormal returns were then tested for significance at various confidence intervals. The confidence intervals were constructed by means of a Monte Carlo bootstrap simulation. The findings show that the JSE was indeed affected by the non-investment grade credit rating announcement during the event window. No concrete evidence could be found for the presence of information leakage prior to the event and is as due to the occurrence of various related and unrelated news events preceding the announcement. The study furthermore indicates that in comparison to other industries the financial industry was affected the most severely. The analysis concludes by investigating each sector within the financial industry and found that the banking sector was affected to the greatest extend.