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RFS Advance Access originally published online on October 28, 2005
Review of Financial Studies 2006 19(1):119-157; doi:10.1093/rfs/hhj004
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© The Author 2005. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Credit Ratings and Stock Liquidity

Elizabeth R. Odders-White
School of Business, University of Wisconsin–Madison

Mark J. Ready
School of Business, University of Wisconsin–Madison

Address correspondence to Elizabeth Odders-White, Associate Professor of Finance, School of Business, University of Wisconsin-Madison, 975 University Avenue, Madison, WI 53706, or call (608) 263-1254 or e-mail: ewhite{at}bus.wise.edu.

We analyze contemporaneous and predictive relations between credit ratings and measures of equity market liquidity and find that common measures of adverse selection, which reflect a portion of the uncertainty about future firm value, are larger when credit ratings are poorer. We also show that future rating changes can be predicted using current levels of adverse selection. Collectively, our results validate widely used microstructure measures of adverse selection and offer new insights into the value of credit ratings and the specific nature of the information they contain.


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