Significant price changes are not only observed after changes of the rating, but also after changes of the rating outlook. In many cases technical factors represent a major reason for bond price changes after a negative rating action. In particular, large price movements can be observed when investment restrictions of institutional investors are triggered by a rating action.
A good example is the downgrade of Fiat in June 2002. The downgrade from Baa2 to Baa3 induced a large sell-off because investors anticipated
a further downgrade to high yield. But Figure 9.1 also shows that bond prices already fell significantly when Moody’s put Fiat on review for downgrade.
Empirical studies by Weinstein (1977), Hand et al. (1992) and Kliger and Sarig (2000) highlight the following relationships between rating changes
and a corporate issuer’s bond and stock prices:
- Bond prices adjust to a new rating.
- Equity prices also react on rating changes, usually opposite to the bond price movements.
- Surprise upgrades tend to result in a reduced implied equity volatility.
There is no indication that new rating information has an impact on firm value. According to the Asset Substitution Theory equity and bond prices react in opposite directions to rating changes, which ultimately leads to changes in the ratio of the market value of equity to debt.
Positioning depends first on finding a niche or part of the market where there is space to establish a profitable position. To discover whether one exists requires an understanding of the trends and factors influencing the market.
How best to focus on the customer is another important decision. How will potential customers react to the message or offer? Or, to put it another way, what message will have the greatest impact on the customer? With positioning decisions, timing is important. First movers have a head start and can get to know the market in detail and build a strong customer-base, ideally establishing a rapport with customers. Brands that are not the first mover should endeavour to launch when the market leader is weak or quiet, or both.
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The concept of positioning relates to how a product is perceived by customers relative to its competitors. It originated in the advertising industry as a way of identifying those attributes of a product that should be placed in the buyer’s consciousness. For example, a product may be positioned as inexpensive, innovative, old fashioned, prestigious, high quality or any of a multitude of other attributes. Positioning influences attitudes to and perceptions of a product or company brand, rather than changing the product itself. The value of positioning decisions is that they increase awareness of a company’s or product’s capabilities. Positioning can refresh or reinforce an existing brand or explain a specific concept. It links closely with such things as brand management, competitive strategy, pricing, segmentation and market entry strategies.
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