The Information Value of Sovereign Credit Rating Reports

We examine the information value of sovereign credit rating reports issued by Moody’s in the sovereign credit default swaps (CDS) markets across 70 countries from 2003 to 2013. We find that the negative linguistic tone in the reports contains new information beyond credit rating actions. We code the sentences in each report into six broad content categories and find that the most informative sentences are related to negative debt dynamics. Interestingly, the financial sector related sentences have lost their informativeness after the 2009 Eurozone debt crisis. Overall, our study reveals novel evidence that sovereign credit rating reports contain valuable default-related information.