To change or not to change? The CDS market response of firms on credit watch

Florian Kiesel, Sascha Kolaric, Lars Norden*, Dirk Schiereck

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


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.
Original languageEnglish
Article number106067
JournalJournal of Banking and Finance
Early online date7 Feb 2021
Publication statusPublished - Apr 2021


  • credit default swaps
  • uncertainty
  • informational efficiency
  • credit ratings
  • rating reviews


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