The CDS market reaction to restatement announcements

I investigate the credit market's reaction to restatement announcements through changes in credit default swap (CDS) spreads. I document an overall positive association between CDS returns and restatement announcements. Specifically, I find that more positive CDS returns are associated with restatements (1) involving fraud and (2) affecting more accounts. Moreover, these reactions are sensitive to the underlying entities' credit ratings and the market-wide investor sentiment. Next, I compare CDS and stock market reactions and find that more negative stock returns are associated with restatements (1) involving fraud and (2) decreasing reported income.