RATINGS, COMMERCIAL PAPER, AND EQUITY RETURNS

We present the first evidence that initial ratings of commercial paper influence common stock returns. Highly-rated industrial issues of com mercial paper, unaccompanied by bank letters of credit, are associated with significantly positive abnormal returns; lower-rated issues are not. The stock price effects of changes in commercial paper ratings al so demonstrate the relevance of ratings to the financing of firms. Rat ing downgrades, especially those that imply an exit from the commercia l paper market, produce significantly negative abnormal returns; upgra des have no effects. Initial commercial paper ratings and subsequent r eratings appear to help investors sort firms by their future prospects .