Decreases in Distance-to-Default anticipate rating downgrades
Procedure to replicate the paper titled: Decreases in Distance-to-Default anticipate rating downgrades
Steps to reproduce
Software requirement: R/RStudio Instructions to replicate the paper Step 1: Download the credit ratings data from CMIE for all listed firms (both NSE and BSE) as shown in Table 1. Save this as "CRAs.rda". Since this data is propritary information, we can't share the dataset here. Step 2: To calculate the daily DtD for all listed firms: 2.1 Download the daily free float market capitalization (mcap) data for all listed firms. This data is propritary information, so we can't share the dataset here. 2.2 Calculate the daily returns based on daily mcap data; 2.3 Calculated the daily equity returns volatility (vol) on a rolling basis as the standard deviation of daily returns over the past 252 days; 2.4 Calculate the threshold debt level (D) from the firm’s balance sheet as the sum of short-term liabilities and half of the long-term liabilities; 2.5 Take T = 1 2.6 Using the "DtD_function.R", calculate the daily DtD for all firms. 2.7 Save the final daily DtD data as "fDtD.rda". Step 3: For each firm, at each event date (downgrades and reaffirmations), create a 360 days event window around the event. Save this as "es.rda". Step 4: To plot Figures 1, 2, and 3, run code "1_Figures.R" Step 5: To replicate Table 2, run code "2_Mean_comparison_test.R" Step 6: To replicate all other figures and tables, run code "3_Econometric_analysis.R"