The credit signals that matter most for sovereign bond spreads with split rating

• We examine the effect of split ratings on bond reactions to sovereign credit events.
• Market responses are stronger for negative events on the inferior ratings.
• Negative events by S&P (the more conservative agency) have the strongest impact.
• Moody's positive events are important when Moody's assigns superior ratings to S&P.
• Split ratings involving Fitch have no market implication.

We investigate how split ratings influence the information content of credit rating events on the sovereign bond markets during 2000–2012. We find that market reactions are far stronger for negative events on the inferior ratings and for positive events on the superior ratings. Such evidence suggests aversion of market participants to the ambiguity inherent in split ratings. Sovereign credit spreads are particularly responsive to negative events by S&P (the more conservative agency in the sample). Moody's positive events have a significant impact only when Moody's assigns superior pre-event ratings compared with S&P. There is little evidence that split ratings involving Fitch have any market implication.