Saturday, April 20, 2024

Downgrades having no impact on BSE, says study

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CREDIT RATING DOWNGRADES leave Barbadians anxious, but they are not even causing a ripple on the Barbados Stock Exchange (BSE).

This “extremely difficult to explain” scenario has left two local researchers looking for answers, considering that “stock markets around the world typically do not react to outlook changes or rating upgrades, but they do react to downgrades”.

“The absence of a stock market reaction on the Barbados Stock Exchange to any of the downgrades of Barbados Government debt, especially the downgrade to non-investment grade status is extremely difficult to explain,” said Dr Justin Robinson and Prosper Bangwayo-Skeete.

Robinson is dean of the Faculty of Social Sciences at the University of the West Indies Cave Hill Campus, and a senior lecturer in management, while Bangwayo-Skeete is an economics lecturer at the same institution.

They conducted a study, entitled Sovereign Debt Challenges In The Commonwealth Caribbean: Stock Market Reaction To Sovereign Debt Restructurings And Credit Rating Reviews. In it, they investigated “the reaction of stock prices to sovereign debt restructurings and credit rating reviews” in six stock markets, including Barbados.

“The study finds that stock markets in the region do not generally react to sovereign debt restructurings and credit ratings reviews . . . . In cases where there was a stock market reaction, the reaction was delayed, pointing to a degree of semi-strong form market inefficiency,” the authors found.

“On the surface, the results suggest that despite the prominence given to sovereign debt restructurings and credit rating reviews, equity investors in the Commonwealth Caribbean either view these events as having negligible impact on corporate profitability and the returns on their investments, fully anticipate these events hence little or no stock market reaction to the announcement of the event, or there are structural features of the stock markets that render them semi-strong form inefficient.”

“If this is so, market prices may not be reflective of current or recent information about firms’ prospects, and the usefulness of these prices to a variety of stakeholders may be questionable,” Robinson and Bangwayo-Skeete concluded. (SC)

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