Abstract
We examine the information content of Australian credit rating announcements by measuring the abnormal changes in credit default swap (CDS) spreads. CDS spreads provide a direct view of credit quality and thus should impound information quickly when investors receive new credit risk-related information via a ratings event. Using an Australian event study, we show that negative credit watches and rating upgrades contain valuable information even after controlling for sources of contamination. We find that negative credit watches elicit statistically significant market reactions: however, subsequent downgrades are anticipated. Upgrades are associated with a significant but small abnormal reduction in CDS spreads, whereas positive credit watches appear to contain no new information.
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