Case Questions:
1.) (a) Analyze the reasons for and against the rating change. (b) Think of arguments for and against considering pensions as equity or as debt. (c) Is S&P's methodology coherent before the change in its methodology? (d) After the change? (e) Is the "on balance-sheet" approach suggested by the academics better? (f) Is ThyssenKrupp right in arguing that its rating should not change?
2.) Analyze the reaction of stock and bond prices (Exhibits 10 and 11) and comment on the reaction of capital markets to the announcement. How much value was lost for shareholders, bondholder, and for the company as a whole? Which potential problem occurs when interpreting the stock market reaction in terms of the downgrade of S&P?
3.) Did this event …show more content…
Using a regression of the total return index of TK’s stock on the return of the HDAX (a broader performance index than the DAX), we constructed a market model, which estimates expected returns of TK’s stock. We chose the total return index of TK, since it measures performance more accurately and also helps us to offset the effect of the dividend payment that occurs at t(1), the day after the AGM of TK, which would have distorted our significance test. The estimation period used were the trading days of the year prior to the announcement t(-250,-1). The event window of t(0,3) was chosen, because the market’s reaction may be delayed due to the complexity of the information and the fragmented nature of TK’s stockholders. This also resulted in the lowest p-value of CAR: a reliable sign that the null-hypothesis can be rejected. Also, we were not able to identify any significant effects on TK’s stock price before the announcement, which would have warranted an extension of the event window to the days prior to the announcement (c.f. Appendix II). In the case of TK’s bonds we have identified a statistically significant reaction on t(0) for TK’s 02/09 bond. We used a mean-adjusted return model to calculate expected returns, since we were not provided with a suitable bond market index. We chose the single day event window t(0), as it appeared to us that the bond market had incorporated the information on the downgrade almost instantaneously. Concerning the value which has been lost for shareholders we observed a decrease of 12.38 % in terms of CAR, equivalent to a loss in absolute terms of € 637.30 mio. We decided that the CAR would be the best estimator for the loss which could be attributed to the rating’s change because CAR disregards market movements and
1.) (a) Analyze the reasons for and against the rating change. (b) Think of arguments for and against considering pensions as equity or as debt. (c) Is S&P's methodology coherent before the change in its methodology? (d) After the change? (e) Is the "on balance-sheet" approach suggested by the academics better? (f) Is ThyssenKrupp right in arguing that its rating should not change?
2.) Analyze the reaction of stock and bond prices (Exhibits 10 and 11) and comment on the reaction of capital markets to the announcement. How much value was lost for shareholders, bondholder, and for the company as a whole? Which potential problem occurs when interpreting the stock market reaction in terms of the downgrade of S&P?
3.) Did this event …show more content…
Using a regression of the total return index of TK’s stock on the return of the HDAX (a broader performance index than the DAX), we constructed a market model, which estimates expected returns of TK’s stock. We chose the total return index of TK, since it measures performance more accurately and also helps us to offset the effect of the dividend payment that occurs at t(1), the day after the AGM of TK, which would have distorted our significance test. The estimation period used were the trading days of the year prior to the announcement t(-250,-1). The event window of t(0,3) was chosen, because the market’s reaction may be delayed due to the complexity of the information and the fragmented nature of TK’s stockholders. This also resulted in the lowest p-value of CAR: a reliable sign that the null-hypothesis can be rejected. Also, we were not able to identify any significant effects on TK’s stock price before the announcement, which would have warranted an extension of the event window to the days prior to the announcement (c.f. Appendix II). In the case of TK’s bonds we have identified a statistically significant reaction on t(0) for TK’s 02/09 bond. We used a mean-adjusted return model to calculate expected returns, since we were not provided with a suitable bond market index. We chose the single day event window t(0), as it appeared to us that the bond market had incorporated the information on the downgrade almost instantaneously. Concerning the value which has been lost for shareholders we observed a decrease of 12.38 % in terms of CAR, equivalent to a loss in absolute terms of € 637.30 mio. We decided that the CAR would be the best estimator for the loss which could be attributed to the rating’s change because CAR disregards market movements and