Credit rating reviews impact CDS spreads, revealing firms' true risk.
The study looked at how the CDS market reacts when a company's credit rating is being reviewed. They wanted to see if rating agencies play a role in monitoring firms' credit risk, providing useful information to the market. The researchers found that when a review suggests a downgrade is likely, CDS spreads increase. On the other hand, if the review confirms the current rating, spreads decrease. This shows that rating agencies play a crucial role in assessing credit risk.