AbstractThis paper examines the equity returns and bond prices of firms around the dates of their placement on CreditWatch by Standard and Poor's. Bond prices and equity returns for companies listed on CreditWatch are compared with a set of firms whose debt was rerated during the same time period but were never placed on CreditWatch. The evidence indicates no market reaction when firms are listed on CreditWatch with subsequent rating affirmations, but a significant reaction exists in those cases where the listing was followed by downgradings. Furthermore, the bond market does not appear so efficient as the stock market since relative bond prices continue to decline as long as seven months after a rating change.