 To change or not to change? The CDS market response of firms on credit watchFlorian Kiesel, Sascha Kolaric, Lars Norden and Dirk Schiereck Journal of Banking & Finance, 2021, vol. 125, issue C Abstract: CDS spreads contain information about expected credit risk, but how accurate is this information when uncertainty about credit risk arises? We document that CDS spreads of firms on negative credit watch (review for downgrade) change systematically into the direction implied by the ex-ante uncertain review outcomes: they widen before reviews concluded with downgrades and tighten before reviews concluded with confirmations. Moreover, CDS spreads widen before deteriorations of corporate credit risk such as leverage, interest rate coverage and Altman Z-score that occur over the review period. Importantly, we do not find similar patterns for firms’ stock returns during the review period. The evidence is novel and suggests that the CDS market not only reflects the increase in uncertainty but also accurate forward-looking information about the outcomes of the uncertainty-inducing events. Keywords: Credit default swaps; Uncertainty; Informational efficiency; Credit ratings; Rating reviews (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:125:y:2021:i:c:s037842662100025x DOI: 10.1016/j.jbankfin.2021.106067 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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