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What happens to Stock Prices’ when a company’s announces a  bond downgrade? Please explain.

What happens to Stock Prices’ when a company’s announces a  bond downgrade?

Please explain.

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Answer #1

Stock reacts negatively to bond downgrade announcement because of following reasons
1. Downgrade of bond indicates the increase in risk of the company and increase in bankruptcy chances. This makes the company less attractive to investors and prices of stock falls.
2. Cost of debt increases for the firm and hence cost of capital increases reducing the intrinsic value of the firm. Hence share prices will fall.
3. Higher interest payments to debt holders will leave very less residual income for shareholders ..
4, Such companies are prone to be affected by recession.

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